GLOBALIZATION AND REFORM OF EUROPEAN SOCIAL MODEL (ESM)

1
GLOBALIZATION AND REFORM OF EUROPEAN SOCIAL
MODEL (ESM)

• Author ANDRE SAPIR for ECOFIN
• (9 September 2005)
• Prepared by GIULIO LICO

2
GLOBALIZATION AND REFORM OF ESM

•  
• Key issues/challenges of Europe in globalized
  world
•  
• EU Key Performance Indicators (KPI )
  priorities in one world
•  
• EU enlargement deepening trade-off
•  
• Gauge of overall un-sustainability / unfitness
  of ESM
•   
• ESMs reform toward more flexibility is pivotal
  to EUs future
• Different LMSP recipes in MSs, suitable to each
  ESMs taste
•  
• EU pushing through SMP, while MSs focusing on
  LMSP
•  
• Micro reforms (supply side) / macro ones
  coordination
•  
•  
• EU policies/history and perspective

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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 1985 TODAY
SHARE OF IMPORTS MANUF.GOODS IN DEVELOPED COUNTRIES FROM DEVELOPING ONES 10   45
FROM CHINA   2 15

  SHARE W. POPULATION W GDP PPP EXPECTED P.A. GDP GROWTH NEXT YEARS
DEVELOPING ASIA 50 25 6
G7 11 45  
EU-25 7 21 2
US 5 21 3
WORLD 100 100 4

• Globalization is faster than EU institutional
  achievements
• Choice for EU is to make globalization an
  opportunity or a threat

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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
  disparities is pit against the completion/deepenin
  g of single market
• 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

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Gauge of overall un-sustainability/unfitness of
ESM

• Nordic countries (Denmark, Finland, Sweden,
  Netherland)
• Highest level of social protection expenditures
• Extensive fiscal intervention on labour markets
  active policy
• Compressed wage structure, low income disparities
• Anglo-Saxon countries (UK, Ireland)
• Large social assistance of last resort
• Cash transfer primarily to working age people
• Conditional access to regular employment benefits
• Weak unions, wide wage dispersion, high incidence
  of low-paid
• Continental countries (Austria, Belgium, France,
  Germany, Luxembourg)
• Insurance based unemployment benefits and old age
  pensions
• Strong union and extensive coverage of collective
  bargaining
• Low income disparities
• Mediterranean countries (Italy, Greece, Portugal,
  Spain)
• Social spending on old age pensions
• Social welfare on employment protection and early
  retirements

  REDISTRIBUTION / VIA TAXES / TRANSFERS POVERTY AFTER TAXES / TRANSFERS
NORDIC 42 12
CONT 39 12
ANGLO 39 20
MED 35 20
POVERTY lt 60 AVERAGE DISPOSABLE INCOME POVERTY lt 60 AVERAGE DISPOSABLE INCOME POVERTY lt 60 AVERAGE DISPOSABLE INCOME
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Gauge of overall un-sustainability/unfitness of
ESM

• Protection against uninsurable market risks
  provided by EPL and UB
• Insiders (those with a stable and regular job)
  prefer EPL to UB

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Gauge of overall un-sustainability/unfitness of
ESM

• Rewards to labour market participation
• 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

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Gauge of overall un-sustainability/unfitness of
ESM

• 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
• Perceived un-sustainability
• Un-sustainability  of CONT/MED to 2/3 of EU 25
  and 90 of EU12 vs. Impairing EU.

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ESM reform towards more flexibility is pivotal
to EUs future
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Different LMSP recipes in MS, suitable to each
ESMs 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 its 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 MSs

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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

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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

13
EU policies/history and perspectives

• SMP not fully implemented/rooted in yesterdays
  thinking
•  
• Since 1993 only goods not yet services.
•  
• Focused on large internal market / economies of
  scale.
• Less focused on todays priority new markets,
  labour retraining, RD, education.
• Missed labour market reform hampers growth
  perspective
•  
• Without labour mobility at national level SMP is
  impaired.
•  
• The watered down Bolkenstein directive impairs
  70 of EU GDP employment growth
• Rigidity in services limits competitiveness of
  manufacturing sector and discourages foreign
  multinational investments
• polish plumber difficult reconciling between
  SMP in EU27 with economic social disparities with
  preservation of ESM for old MSs

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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 cant be
  stopped
• Manufacturing in China and back offices in India
• Manufacturing and services by NMS in proximity
• 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