Europe’s social shock-absorbers show crisis strain

Economic growth


Reuters.pngReaders outside Southern Europe may not realise the growing crisis that is developing across the region. As Unilever CEO Paul Polman warned in January, “the biggest issue in Europe is going to be social cohesion”. Similarly, his colleague, Jan Zijderveld, European head, warned back in August that “poverty is returning to Europe”. Zijderveld also highlighted how they were successfully introducing business models from “Indonesia (where) we sell single packs of shampoo for 2 to 3 cents and still make good money“.

Senior Reuters editor Paul Taylor has just produced this excellent summary of the issues. Exceptionally, he has allowed the blog to reproduce it in full, with the permission of the author. As he notes, the whole post-War fabric of Europe, built at such cost, is now under threat. It is an important reminder of the fact that the crisis is far from being solved and is, in fact, steadily getting worse.

18 ‎March ‎2013, ‏‎20:39:26 | Paul Taylor
PARIS (Reuters) – Grigoris Lemonis, a 73-year-old Athens pensioner, uses his €580 ($750) monthly state pension to support his wife and the family of his son, an unemployed cook with two small children and a wife who works occasionally as a cleaner. Three-generation families surviving on a single income are increasingly common across southern Europe as mass unemployment tears at the fabric of closely knit societies.

The continent’s social shock-absorbers are creaking under the strain of a prolonged economic crisis that began in 2008 and engulfed the euro zone in a sovereign debt crisis from 2010. The welfare state that Europeans built after World War Two, and which many view as a defining achievement of their civilisation, is one reason why the Great Recession has not triggered a revolution or severe social unrest so far.

“Daily life has become pure misery,” said Lemonis, a former painter in the construction industry who owns his own house. “We are up to here with bills and once all that is paid there’s nothing left to live a decent life,” he said, adding that the family can only afford meat once or twice a month.

With more than 26 million unemployed in the 27-nation European Union, including nearly 6 million young people, the system is struggling, and in some places failing, to cope. Many of the jobless have exhausted their benefit entitlements. “In many countries, the poor are getting poorer,” says Laszlo Andor, the EU’s Commissioner for Employment and Social Affairs, pointing to a growing North-South divergence. “Europe’s social fabric is clearly under pressure and a stronger response at EU and national level is needed.”

Social spending rose across the continent in the first phase of the crisis but states like Greece, Portugal, Ireland, Spain and Italy that were hardest hit have now had to cut outlays on pensions, healthcare, education and unemployment benefits. Countries that target social spending towards providing services such as childcare, vocational training, job-search assistance and accessible healthcare have better results than those that spend most in cash payments to pensioners and the unemployed, Andor told Reuters in an interview.

While Austria and Spain both spent about 15 percent of GDP on social welfare other than pensions, Austria achieved a 55 percent poverty reduction while Spain managed only 28 percent. Countries like Italy and Poland that spend a higher share of their social budget on pensions tend to be less effective in alleviating poverty because the working-age population most severely hit by the crisis is less well covered, Andor said.

But welfare systems breed their own interest groups and are fiendishly hard to transform.

Political leaders are fretting about the affordability of the European social model in an era of high public debt, low growth and ageing populations. “If Europe today accounts for just over 7 per cent of the world’s population, produces around 25 per cent of global GDP and has to finance 50 per cent of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life,” German Chancellor Angela Merkel said in an interview with the Financial Times last December.

Social spending as a proportion of output is now at least 6 percent higher than in 2007 on average in the 34 countries of the Organisation for Economic Cooperation and Development, a club of industrialised democracies of which 21 are EU members. Moreover, ageing populations are set to drive up the costs of pensions and healthcare in coming years, the OECD said.

The majority of EU governments have used the crisis as a reason to raise the retirement age, bringing it more into line with increasing life expectancy, said Willem Adema, an OECD expert on employment, labour and social affairs. Social scientists distinguish three broad welfare models: Nordic, continental European and Anglo-Saxon.
Nordic countries offer a high level of “cradle to grave” welfare with an emphasis on pre-school childcare and education, designed to keep women and older people in the labour market.

The continental European model features contributory social insurance systems that offer strong protection to “insiders” with protected jobs, while continuing to regulate employment and the labour market. The Anglo-Saxon model tends to make welfare payments smaller and more selective and encourages private provision of healthcare, education and pensions for the better-off.

The Nordic model seems to have proven the most effective at reducing poverty without discouraging people from work, although it comes with the highest taxes. Britain and Ireland pay cash allowances to stay-at-home single mothers, contrary to the OECD and EU view that such money is better spent on providing public childcare. In Germany, Merkel’s government plans to introduce such a benefit this year.

“It makes more sense to get people into work than to focus on paying benefit to stay home,” the OECD’s Adema said. “Yet amazingly, some countries are cutting pre-school childcare.” European governments have found it easier to trim welfare systems at the edges than to reform them radically. In particular, spending more on young children and school-leavers to promote employment and skills and less on the elderly is politically difficult. Older people vote more than the young.

“In many countries, it is the middle class who are the direct beneficiaries of social security entitlements,” policy analysts Patrick Diamond and Guy Lodge wrote in a paper for the Policy Network think-tank. “This makes pensions and welfare payments to older cohorts practically untouchable.” The Netherlands, where retirees enjoy the highest purchasing power in Europe, provides an example. Its recently created 50PLUS party that campaigns on behalf of pensioners won two seats in the 150-member parliament for the first time last year.

Since the new coalition of centre-right Liberals and the centre-left Labour party agreed to raise the retirement age to 67 from 2021, support for the grey movement has soared. A poll this month showed 50PLUS would win 18 seats if the election were held now, making it the third biggest party.

Older voters may fight their political corner, but they also should grasp the need to leave resources for social spending for the young. Just ask Lemonis – the Athens pensioner supporting two younger generations on his dwindling monthly allowance. “At least we pensioners are old and we’ve lived our lives,” he said. “I’m worried about our children. What will they do when we can no longer help them?”


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