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EUROPEAN COMMISSION
László ANDOR
European Commissioner responsible for Employment, Social Affairs and
Inclusion
Europe's social crisis: Is there a way out?
EMBARGO : 15:30 CET
Max Planck Institute for Social Law and Social Policy, München, 12 April
2013
SPEECH/13/309
Ladies and Gentlemen,
The European Union is living a social crisis of a scale that is unprecedented in decades.
What I would like to do today is to give you a snapshot of the situation, highlight how
different the employment and social situation is across countries, analyse the main
reasons for this crisis and discuss the possible ways out.
Most of the numbers and graphs which you will see come from the European
Commission's annual review of Employment and Social Developments in Europe for
2012, which we published at the beginning of January, and from a Quarterly review of
the employment and social situation which came out at the end of March.
The employment and social situation in the EU
You can see that the unemployment rate in Europe has increased very significantly since
2008. As of January 2013, the unemployment rate is estimated at almost 11% in the
EU-27, and has reached 12% in the euro zone.
This means that approximately 26 million people who are looking for a job across the EU
cannot find any. 19 million of them are in the euro zone.
You can also very well observe in this graph the double-dip character of our economic
crisis: after a mild recovery in 2010, unemployment has been rising steadily again since
the middle of 2011.
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Compare this with developments across the Atlantic: While unemployment rose faster in
the US in the first phase of the crisis, the recovery has been much stronger and the US
unemployment rate is now below 8%.
Over time, the increase in unemployment is obviously feeding into higher long-term
unemployment. Amongst the 26 million jobless people in Europe, 43% have been
unemployed for over a year.
It is not acceptable to see such increases in unemployment and long-term
unemployment for such a long time. It should be every politician's priority to reverse
such trends.
But perhaps the key observation about the current crisis is that there is an
unprecedented divergence -- or polarisation -- in unemployment and other socioeconomic outcomes among the 17 countries sharing the common currency.
This is very different from what we saw in the first years after the launch of the euro.
The period up to 2004 was marked by convergence in output and employment, in favour
of southern and peripheral euro area countries that saw their economies catch up
gradually with those of the core of the EU.
The weighted average unemployment rate of the group made up of Cyprus, Estonia,
Greece, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain then even became
lower, by some 1 percentage point, than the average rate for Austria, Belgium, Finland,
France, Germany, Luxembourg and the Netherlands. Then both aggregate rates
decreased in parallel until 2007.
Finally, the convergence stopped in 2008 and unemployment started rising faster in the
Southern and peripheral countries of the euro zone as of 2008.
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Divergence went on and accelerated with the crisis. As a consequence, the gap in NorthSouth (or centre-periphery) unemployment was as high as 7.5 percentage points (pps)
in 2011, and it continued to increase throughout 2012, further and faster, as shown on
the slide.
The gap reached an unprecedented 10 pps in the first quarter of 2012 and is estimated
to stand at 9.8 pps for the whole of 2012, before peaking at 10.8 pps this year (18% in
south and periphery, against 7.2% in the north of the euro area). This gap had been
‘only’ 3.5 pps in 2000.
Much of the unemployment crisis in Europe is linked to the systemic crisis of the
common currency, the euro. This is particularly true since 2011 when a mild recovery
stopped and unemployment started rising again. I will come back to this subject at the
end of the presentation.
On this slide you can see relative developments in poverty levels across Europe between
2008 and 2011.
In the EU we observe three main indicators of poverty and social exclusion.
The first is called at risk of poverty rate and measures how many people live on less
than 60% of the median income in the society.
The second is called severe material deprivation and measures absolute poverty – e.g.
whether people can afford to heat their house or buy meat regularly.
The third indicator is the number of people in households with low work intensity, i.e.
households where adults work less than 20% of the time they could theoretically work in
a year.
If we eliminate overlaps, these three indicators together give us the number of people at
risk of poverty or social exclusion.
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Until 2011 the share of population at risk of poverty or social exclusion has been rather
stable. However, then the effect of the crisis became apparent – and this graph shows a
rise in the risk of poverty or social exclusion in most EU Member States.
In total, nearly 120 million people are at risk of poverty or social exclusion in the EU as
of 2011, which is some 6 million more than at the beginning of the crisis.
The indicator most directly linked to the deteriorating labour market conditions is the
share of households with low work intensity, which has been rising in most countries.
Another clear indicator of a deepening crisis is financial distress of households, defined
as necessity to draw on savings or run into debt to cover current expenditures. Financial
distress has been on the rise since 2011 for all income groups, but as you can see, the
poorest quarter of households has been particularly affected. Almost 25% of low income
households reported financial distress at the end of 2012.
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Traditionally, since after the WWII, welfare state systems in Europe were shielding
households against the effects of economic shocks. If you lost a job, you would
receive unemployment benefits, plus you were entitled to a number of other benefits
depending on your family situation and other needs.
During an economic crisis, benefit payments would grow in importance as sources of
household income, helping keep up consumption and demand even as labour market
incomes fell.
This is also what you can observe very well in this graph for the year 2009, which was
the first bottom of the current economic crisis: increased spending on benefits and lower
tax collection largely offset the fall in household incomes from the labour market and
property.
However, what you can also see is that the automatic stabilisation function of social
systems has weakened as the crisis continued.
In 2009, social benefits played their role as automatic stabilisers, even to a greater
extent than tax systems.
In late 2011 and 2012, the stabilisation is much weaker in response to the slowdown of
market incomes, and is nearly negligible compared to 2009.
The main explanation for this weakening is, again, the crisis of Europe's currency union,
and the fact that the solution to this crisis has been predominantly sought in individual
adjustment on the side of countries facing the biggest debt problems.
Pressured by the financial markets, these countries had to increase taxes and reduce
public spending in a very rapid way, and expenditure on social protection and public
services has been heavily affected. Consequently, household incomes – and therefore
household demand – have been less protected than before.
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Of course the need for automatic stabilisers to counteract the crisis has differed per
country, depending on whether it experienced and economic shock or whether it was
doing well:
In Germany, market incomes increased and benefits declined after 2010.
On the other hand, in Spain, market incomes continued to decline and benefits did not
compensate for much of this decline after 2010, as Spain had to rapidly reduce spending
in order to convince financial markets that its debt is sustainable and will be repaid.
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On this slide you can see a comparison of how social expenditure behaved during the
current crisis and previous recessions.
You can see that the drop in output during the present crisis has been greater than in
previous slumps.
But you can also see that social protection spending was quite stable during previous
crises, while in the current one, social expenditure was reduced markedly, even as the
recession continued.
This is again linked to the sovereign debt crisis, where governments started putting
priority on stabilising their budgets rather than stabilising their economies or the
European economy as a whole.
They had to quickly convince the financial markets that they were not going to default,
because there were no other arrangements in place, like a central bank providing loans
of last resort to governments, or a system of budgetary transfers between countries to
help those in deepest crisis.
Emergency lending facilities were created, like the European Financial Stabilisation
Facility or the European Stabilisation Mechanism, but access of governments to such
emergency loans has been strictly conditioned on rapidly restoring budgetary balance
and stopping the increase in sovereign debt. The fall in social protection expenditure has
been an unwelcome consequence of such emergency arrangements.
National-level responses to the social crisis
Trends in social protection expenditure are important not only because they affect the
living conditions of vulnerable households and help sustain consumption and demand in
the economy, but also because benefits help people return to work.
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We see clearly that the chances of moving from unemployment back to work are highest
among people who are registered with employment services (job agencies) and receive
benefits than for others. These people are also a lot less likely to drop out of the labour
market.
Our data on labour market transitions in 2010-11 show that on average 24% of the
unemployed returned to a job within one year and 21% left the labour market; in
contrast, for those registered and receiving benefits, the rate of return was 8 pps higher,
and the rate of drop-out into inactivity was 11 pps lower.
Lifelong learning also plays an important role: a different data set shows us that in
2010-11, 35% of the unemployed returned to employment within a year after
participation in up-skilling or training, compared to only 29% of those who did not
participate in lifelong learning.
And lifelong learning tends to make even bigger difference for transitions from inactivity
to employment.
Another important type of social expenditure is investment in childcare. This graph
shows that the higher the share of young children in formal childcare, the higher the
employment rates for women with young children.
In other words, public investment in making childcare accessible and financially
affordable removes barriers to women's labour market participation.
I say investment here, even if we are partly speaking about salaries of crèche or
kindergarten nurses and various running costs. These are not one-off investments like
when you build a road, so they are typically not considered as investments from the
accounting point of view, but still they are investments in the economic sense: childcare
enables young mothers to do paid work in line with their professional qualifications
rather than stay at home, and of course childcare contributes to developing children's
skills.
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The European Commission has been emphasising that governments need to fix their
budgets in a smart way, protecting key investments in economic growth and paying
attention to how spending cuts and tax increases affect low-income groups. Social
investments like those I just mentioned – lifelong learning, job-search support,
childcare etc. – are among the key expenditures to be protected if not prioritized.
But another aspect of “smart fiscal consolidation” is to analyse why certain governments
are able to get greater value for money in terms of poverty reduction for a given level of
social protection spending.
Generally, greater levels of social protection spending correlate with reduced risk of
poverty, but it is evident that in many cases, countries with similar social budgets
achieve very different results. This suggests that there is room for efficiency gains in
some countries. I will come back to this in the context of the Social Investment Package
which the Commission recently put forward.
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Let me stick for a little longer with the question of which policies help the unemployed
back to work, but this time not from the angle of public expenditure but rather in
relation to wage-setting.
Many people assume and argue that when unemployment is high, wages need to fall so
that companies can afford to hire the unemployed people while remaining able to sell
their products on the global market.
This may or may not be true, depending on how high wages have been, the nature of
products, their quality, the destinations where they are being sold, and of course
depending on productivity developments.
However, what is crucial to understand in any case, is that wage developments affect
both the demand and supply sides of the economy. Wages and other labour costs
influence companies' cost-competitiveness, but wages also represent means with which
people buy other people's products and services.
What these two graphs show is that on the one hand, increases in real effective
exchange rates are associated with declines of employment levels, linked notably to
degradation in price competiveness, but on the other hand, increases in real unit labour
costs are associated with growth in employment levels linked notably to positive internal
demand effects.
So the analysis of whether wage levels need to fall or rise in any particular economy at
any given point in time needs to be quite careful.
What is clear, however, is that we will not be better off if we all suddenly reduce our
wages at the same time. Rather, there seems to be a case for reflation of wages and
prices in countries with strong performance and strong surpluses. This would accompany
and counterbalance the on-going correction in wage levels in countries that have
recorded high current account deficits due to price bubbles before the crisis.
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Wages are of course not set by the government, with the exception of public sector
wages. They are negotiated between employers and workers. But governments to have
tools to influence wage levels, for example through statutory minimum wages, by laws
on regular indexation of wages to prices, or by extending the outcomes of collective
agreements throughout a sector or through the whole economy.
Minimum wages have an important role in preventing deflation, preventing in-work
poverty, ensuring dignity of work and supporting aggregate demand.
They essentially aim to ensure that all workers can buy a certain minimum decent
amount of goods and services in return for their labour. If no minimum wages existed,
workers would not only be a lot more vulnerable, but the whole economy would be
worse off as there would be a lot less demand.
Of course, if minimum wages are set too high, this may discourage companies from
hiring certain workers, especially young or low-skilled workers at a time when companies
face tough competition.
Overall, however, evidence from the crisis shows positive rather than negative impact of
minimum wages on employment - even in a severe economic downturn, as this chart
illustrates (2010).
Higher minimum wages have been in fact associated with higher levels of employment of
low-skilled people. The graph also indicates that minimum wages might encourage lowskilled workers to increase labour supply. People are only willing to work from a certain
level of pay. Without minimum wages, there is a risk of more people relying on social
benefits rather than contributing with their labour to the economy.
Moreover we find that minimum wages can help reduce the gender pay gap, which
remains very high in the EU, about 16% on average.
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European-level responses to the social crisis: Employment, Youth
and Social Investment packages
Let me now briefly mention three major policy initiatives which the European
Commission has put forward over the past year in response to the employment and
social crisis I have described.
The Employment Package which we launched a year ago is a set of documents that
broadened and strengthened the employment policy agenda.
Traditionally, the European Employment Strategy focused a lot on the supply-side of the
labour market, such as on modernising employment protection legislation, skills
development through lifelong learning etc.
But it is clear that if we are to overcome the present crisis and increase employment
towards the 75% target set in the Europe 2020 strategy, we need to also boost demand
for labour. We need to support job creation, and maintain employment that exists.
This can be done through a number of different measures, such as by shifting taxation
away from labour, making a more effective use of hiring subsidies, or by supporting
entrepreneurship and the social economy.
But it also means that we need to be attentive to the particularly large job creation
potential in certain areas of the economy, such as ICT, the green economy or the health
and care sector. The needs of the economy and society will only grow in these areas due
to technological development, ageing and depletion of natural resources. We should
make sure that we have enough adequately skilled and mobile people to meet the
expected demand.
The Employment Package also calls for a balanced approach to labour market reforms so
that labour markets become more dynamic and inclusive.
A key element is to reduce segmentation of the labour market into groups with very
different levels of employment protection: segmentation condemns many people to
precarious economic existence and prevents them from properly developing and using
their skills.
We also need to counter in-work poverty: we need to build competitiveness on high
levels of productivity, not on squeezing the cost of labour and forcing people to move
from one unstable contract to another.
The Employment Package also shows ways to better forecast labour market needs and
identify the skills needed, so that investment is orientated on the right skills and that
workers are better matched with the jobs that need them.
Finally, the Employment Package aims to create a genuine European labour market by
removing remaining obstacles to the free movement of workers in Europe, and
transforming the existing EURES network into a true European placement and
recruitment service that will match and place jobseekers across borders.
In December, the Commission adopted a Youth Employment Package to step up
action against the continuously rising levels of youth unemployment and inactivity.
The Youth Employment Package includes four initiatives:
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First, it aims to decisively improve school-to-work transitions by Youth Guarantee
schemes. On 28 February 2013, the Council has agreed on a recommendation –
proposed by the Commission in this Youth Employment Package – that every Member
State should ensure that every young person under 25 gets a quality offer of
employment, education or training within four months of becoming unemployed or
leaving formal education. These schemes are needed to ensure that every young person
really gets a chance. They can be set up with the help of EU funding, in particular the
European Social Fund.
Second, we make another step towards a quality European framework for traineeships,
which should encourage companies to offer traineeships with good learning content and
decent working conditions. Studies clearly show that high quality traineeships contribute
to increasing the employability of young people and are important stepping stones in the
progression to regular employment. The Commission will make a legislative proposal on
this in 2013.
Third, we seek to improve the quality and the supply of apprenticeships by launching an
European alliance for apprenticeships. This alliance will promote transfer of successful
apprenticeship schemes across Europe. Dual learning (in-school and in-company) is very
successful in countries like Germany and Austria, but nearly non-existent in many
others. Apprenticeships can be a very good way to improve the quality of training, build
skills that are relevant for the economy, give young people work experience while still
studying, and consequently make them more employable.
Finally, we aim to reduce obstacles to labour mobility among young people within
Europe, to open access to more job opportunities. As I mentioned, we need to create a
genuine European labour market. 53% of young people are willing or keen to work in
another Member State. To facilitate this, the Commission will modernise the EURES job
mobility portal to offer increased possibilities for job-matching online and extend it to
apprenticeship and traineeship placements. We are also running a pilot scheme for
transnational job placements, called "Your First Eures Job".
Finally, in February we have put forward a policy vision for modernising welfare states.
The proposals aim at making social and labour market policies more effective in terms of
reducing poverty and social exclusion and thereby at strengthening the economy.
The package is based on the concept of social investment – expenditure that develops
human capital to empower and support people through all stages of their lives.
Social investment helps develop the stock of human capital, like skills and competences,
but also the flow of human capital into and within the labour market, helping everyone
to make the best possible contribution.
Core social investment areas are active labour market policies, child-care, education,
social rehabilitation, and active ageing, but the concept of empowering and enabling
people's participation in society is relevant for all areas of employment and social policy.
The Youth Guarantee I mentioned earlier is a clear example of social investment.
Social investment means 'anticipating' and preventing social and economic exclusion
rather than 'repairing' things after hardship happens.
Social investment is needed now, as we experience profound unemployment crisis and
rise in poverty, if we are to avoid large losses of human capital and an erosion of social
cohesion. If we do not undertake social investment now, the economic costs in the
future will be much higher.
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Response to the systemic crisis of the monetary union and its
social consequences?
The three policy packages I have just outlined show how stronger employment and
social policies, and the associated public expenditure, can help Europe recover from the
economic and social crisis in which it has been mired for five years now.
But by way of conclusion, let me underline that a key requirement for overcoming
this social crisis is to deal with the systemic crisis of the currency union.
The peripheral countries have faced big uncertainty over their future membership in the
euro zone. They had to undertake very harsh fiscal consolidation (cutting public
spending and increasing taxes) and internal devaluation (measures to reduce prices,
largely by reducing labour costs), with obviously negative impact on domestic demand.
But despite all the cuts in public budgets and company costs, the interest rates faced by
governments and companies in these countries have remained very high, while in the
'core' countries, interest rates have been low. Markets have been pricing highly the
perceived default risks in the periphery.
In my view the main problem is that we have been going through a systemic crisis of a
currency union, but we have been trying to solve it mainly through adjustment within
the individual troubled countries – fixing budgets, rescuing national banks and trying
to restore national competitiveness against other countries. But we have not done
enough to eliminate market uncertainty about whether there is a viable future for the
euro zone of 17 Member States, with another 8 (soon 9) countries committed to
adopting the euro in the future.
It has not been clear to the markets whether each of these countries is competitive
enough to participate in the common currency, whether euro zone membership offers an
acceptable economic future to each of its members, and what kind of support the group
is willing to provide to individual members when they get into trouble.
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We could compare this to a multi-apartment house, where the flat owners discipline each
other to have every flat insulated and painted, while the skeleton of the building is
structurally damaged and the central heating doesn’t work properly. We have not been
paying enough attention to these systemic problems, and perhaps some European
leaders are even failing to recognise them.
Since the Euro zone crisis erupted, European countries, and in particular the 17
members of the Euro area, have of course put in place some collective solutions, like the
European Stability Mechanism as a fund to provide emergency lending to troubled
countries – the so-called sovereign bailouts.
But these collective arrangements were developed step-by-step, under considerable
uncertainty, and have not been robust enough and fast enough.
Many truly systemic solutions, such as mutualisation of sovereign debt within the euro
zone or a mandate for the European Central Bank to act as a lender of last resort for
governments, have been nearly taboo or have not been adequately discussed. Others,
like pan-European deposit insurance and common rules for resolution of failing banks,
are taking very long time to agree upon. Europe has made only limited progress in fixing
the key design flaws of the euro zone.
The European 'core' has benefitted from low borrowing costs and has done much better
in terms of output and employment, but the economic crisis has been inevitably
spreading from the periphery to the whole of the euro area. Even Germany saw negative
growth at the end of 2012 and faces very low growth this year.
But in terms of unemployment and social problems, the differences between euro zone
member states are huge. You probably know that the youth unemployment rate in Spain
and Greece is over 50%, while in countries like Austria or Germany it is less than 10%.
With such divergence across the Euro area, I think the key question we have to ask
ourselves is this: If this currency union can at all continue functioning, what economic,
social and political future does it offer to the people of its Member States?
Unless European leaders agree on really systemic and collective solutions that ensure a
decent economic future for every country participating in the common currency, there is
no light at the end of the tunnel for many of the troubled countries, and there is no light
at the end of the tunnel for Europe.
We need to restore some convergence in terms of the growth potential of the individual
countries of the Economic and Monetary Union. We need to decisively act to reduce
unemployment and exclusion in the 'periphery'.
The debate on repairing the economic and monetary union and putting it on much more
solid footing has been going on for many years in the academia and for at least a year at
the high-political level, but there is very little unity on key issues like the mandate of the
central bank, or creation of a banking union with common deposit insurance and rules
for winding up failed banks.
In general, there is a lot of fear around the issue of budgetary transfers between euro
zone countries. Economic theory teaches that a monetary union clearly needs a fiscal
union, but we do not seem to have enough political unity at the moment to make it
happen.
But the situation is really worrying, and the divergence between the 'core' and periphery
countries cannot go on for a long time.
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We all need to realize – citizens and political leaders – that there is no way out of
Europe's social crisis unless we properly redesign the currency union; unless we
structurally fix or even reconstruct the building.
For this we need discipline, collective determination, but also solidarity between the rich
and the poor.
The euro zone crisis is inflicting enormous economic and social damage on Europe at the
moment. We are in a much worse situation today not just compared to 2008, but also
compared to 2010.
We must all realize that what is at stake is really the future of the whole European
project.
What is at stake is peace and prosperity for each of us individually, and for all of us
collectively.
We must face up to this reality, and do what it takes to overcome this crisis.
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