Year LII, 2010, Single Issue, Page 72
THE FUTURE OF THE EUROPEAN SOCIAL MODEL
IN THE ERA OF GLOBALISATION
According to Stiglitz “globalisation is the field in which there emerge some of our deepest social conflicts, including conflicts over fundamental values, and the most significant divergences between the roles of the governments and the markets. Whereas the economy has to concentrate on efficiency, the whole question of equality must be left in the hands of politics.”[1] To date, however, politics has not shown itself to be willing or able to fulfil this role at international level.
World Trade Organisation (WTO) agreements reached in the 1990s have encouraged economic liberalism and laissez-faire economic policies, as shown by the progressive elimination of customs duties worldwide and by deregulation, a trend that has eliminated the rules that impeded the free market. China’s subsequent entry into the market economy, symbolically sanctioned by agreements reached (again within the ambit of the WTO) in December 2001, has fuelled increasingly aggressive economic competition between global corporations and between states. Over the first decade of the new century, the exponential growth of the developing economies — China’s emergence as the world’s leading commercial power, after being classified only ninth in 2001, has been a particularly important driving force of competition and of the process of free enterprise globally — has thrown into sharp relief the contradictions and limitations inherent in the phenomenon of globalisation without government.
Unsurprisingly, therefore, in the wake of the 2008 financial crisis, the debate on the relationship between the state and the markets has become an important and particularly topical one. The effects of the crisis have been felt in the working and business worlds and the states of Europe’s Western economies, increasingly indebted, have proved unable, through recourse to fiscal and social policies, to reduce the excesses of capitalism, which has spiralled practically out of control at international level. It is no secret that the laissez-faire approach derived support and impetus mainly from the United States and the United Kingdom. Instead, the social-state model in continental Europe, well established and more geared at protecting the weaker sections of society generally, sought to lessen social inequalities and to control the degenerative trends, potentially dangerous for social and political order, that turbulent economic development inevitably produces.
It is no coincidence that this model of the social state asserted itself in a period of great economic growth (the 1960s): the aim was to favour the birth of an inclusive society, a deepening of democracy in different European countries (including Italy and Germany), and a greater role for the trade unions, and there is no doubt that the economic “miracle” of those years proved decisive in generating the resources needed to bring about improvements in working conditions, social welfare and social security. Indeed, once the thrust of that period was over and rates of economic growth became more stable and moderate, the European states, in order to conserve this model in the long term, were forced gradually to increase their level of debt.
Thus, the European model of the social (or welfare) state entered a critical phase in which its foundations (the active presence of the state in the economy, hefty public spending and increasing taxation) seemed less secure and were thrown into question by the industrial, economic and commercial successes of other models (primarily the Asian one).
Does this mean that the time has now come to abandon the model of the social state created, over centuries, in continental Europe? In this regard, it is worth recalling that social policy is a concept that in some areas of Europe was debated, albeit in general terms, as early as the seventeenth and eighteenth centuries, and in more precise terms after the advent of the Industrial Revolution and the reforms introduced in Germany by Bismarck. But the social state in the modern sense of the welfare state dates back to the policies of Roosevelt’s New Deal, introduced in response to the economic crisis of 1929. Following the stock market crash and the collapse of the banks and of investments, but above all, because of the dramatic problem of mass unemployment, the American government substantially redefined the role of the state in the economy and, for the first time in history, sought to do this on a continental scale and within a highly structured democratic system. In particular, the Roosevelt administration increased public spending in order to achieve full employment (and in so doing reformed the nature and aims of the Federal Reserve), pursued a policy of territorial intervention through the building of roads, bridges and canals and the revision of numerous town planning schemes, and made jobs more secure, introducing forms of insurance against unemployment; Roosevelt also introduced forms of social security and healthcare, and clarified the responsibility of private enterprise towards society as whole.
In Europe, state intervention within a democratic system was a policy not seen until the post-war period, which coincided with the pacification of the continent and the start of its economic recovery. The first social programmes aiming to protect families in difficulty (guaranteeing them a minimum income), to increase the level of education, and to combat unemployment were introduced in 1942 and 1944. Inspired by the work of Englishman William Henry Beveridge (the same Beveridge who, together with Spinelli, Orwell, Camus and others founded, in Paris in 1944, the International Committee for European Federation), these were programmes that would, over subsequent years, give rise to an out-and-out public healthcare and social security system. However, it was not until the economic recovery of the 1950s and 1960s, and thanks in part to the increased income the state derived from the booming economy, that there emerged and spread, in many European countries, support for and a determination to implement policies geared at improving working conditions; this was a trend fed also by an increasingly strong trade-union mentality among workers and by the growth of education. It resulted in the introduction of legislation to protect the weakest classes, together with a fairer system of redistributing of tax revenues, and in the creation and strengthening of public welfare and social security institutions.
The instruments used by the different states to balance the socio-economic forces in the field have, given their different economic and political histories, varied considerably. Thus, over the course of time, some countries have favoured greater equalistation of taxation or of welfare, while others have preferred to ramp up social insurance contributions.
At this point, it is worth considering briefly the Rhine “social market economy”, a model often cited as an example to follow and which has indeed proved successful, also in the recent past. Michel Albert described it exhaustively in his book Capitalism Against Capitalism. This model is based on the free market, especially with regard to prices and salaries, but the working of the market “cannot on its own regulate social life as a whole. It needs external balancing elements; it needs to be balanced by social policy elements that are decided a priori and guaranteed by the state. The German state defines itself as a social state”, in other words “as the protector of public assistance and of free negotiations between employers and workers” that, in accordance with “the social-democratic current, has [through co-determination] laid the foundations of worker participation in the life of companies and of the institutions”.[2] However, as Michel Albert explains in his book, for this approach to succeed, a country’s monetary stability and the independence of its central bank must be guaranteed over time. Therefore, in Germany the investment banks have had to assume an increasingly prominent role, not only funding the activity of companies, but also managing their property. There are indeed only two cases in which the German state has, formally, the right to intervene in the economic and social sphere: a) to restore competition where there emerge instances of market domination; b) to guarantee the social order.
Actually, this model has, to a large extent, been reproduced in France, Austria, Belgium and Luxembourg, albeit with variations dictated by these states’ different realities. And its success is demonstrated by the fact that, within continental Europe, only the Scandinavian model, established in Sweden, Finland, Denmark and the Netherlands (where up to a third, or more, of the GDP goes on welfare spending), has proved able to guarantee a higher level of social protection, both in the ambit of support for employment and in that of welfare and security, the cost of this being covered mainly by tax revenue and, to an extent, by forms of obligatory social contributions. In its Anglo-Saxon version (Great Britain and Ireland) the welfare state has focused more on protecting the weakest and most marginalised members of society than on providing more general support, with aid and assistance being guaranteed, above all, to these categories. In this case, the level of state intervention has remained relatively limited and many services remain private. In this context, a much lower proportion of welfare expenditure is covered by tax revenue and social contributions.[3] Finally, the Mediterranean model (Italy, Greece, Portugal and Spain) has gone to a different extreme, concentrating mainly on the protection of workers, who have guaranteed social insurance and pension entitlements linked to their national insurance contributions.
All these policies took root gradually in Europe in the wake of the Second World War; then, in the 1970s, they were suddenly stepped up as a reaction to the first major monetary and oil crises. As a result, public debt in the European states began to grow, without provision being made for adequate guarantees of repayment.
From the mid-1990s onwards, the debt crisis of the Western economies deepened as a result of the growing globalisation and liberalisation of the markets, trends encouraged, in the USA in particular, by permissive banking and financial systems whose lack of regulations meant that very few restrictions were placed on the movement of capital. In the face of a huge increase in economic growth, albeit not evenly distributed, the conditions were created for a volatile economy, based more on speculation and on capital flows than on the real economy. Indeed, most people now agree that liberalisation, deregulation and wild privatisation, whose seeds were sown at the close of the last century, are among the main causes of the states’ increasing weakness, shown above all in the fields of capital control and respect for collective bargaining, and in the three-way relationship between the state, enterprises and banks. Of course this weakening of the role of the state is not a uniform or a global phenomenon; nor is it restricted to a single area (Europe) of advanced economic and monetary integration. Indeed, a marked lack of homogeneity has emerged (and been noted by public opinion in the different countries), such as the spread in the interest rates paid on government bonds: the difference between two eurozone countries, Germany and Greece, is emblematic in this regard, and has also become an indicator of the solidity of the European economic and monetary union. It is also a case with obvious practical consequences: the fact that in February 2009 Greece was paying its creditors four percentage points more than Germany was paying explains why, despite the advantages in terms of yield of investing in Greece, Germany, which offered (and still offers) greater guarantees of repayment and stability, was continuing to attract more purchasers of its bonds.
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The 2007-2008 financial and economic crisis has had different effects in different parts of the world: some countries are recording improvements in their economic conditions, while others are regressing. The latter include, for the first time in at least two centuries, the countries of the Western world. Indeed, unable either to emerge from the crisis or to deflect its consequences onto other parts of the world (as they were able to do in the past), they currently seem to be the ones that are struggling the most. To tackle this situation, and in an effort to save businesses and banks in difficulty, the United States, the homeland of economic liberalism, has been obliged to have recourse to the kind of direct state interventions that it has always criticised and opposed (further swelling its public debt in the process).
In many European countries, too, the injection of aid into the banking system and into the economy in general has had the effect of further increasing the public debt. As a result, these countries are now finding it increasingly difficult to maintain the levels of welfare spending of the past, given that they are now recording low, zero or even negative economic growth. Consequently, all the countries have been striving to do more, both internally and externally (on the international financial markets), to support their respective production, economic and social systems.
But if we consider the nature and composition of the states’ public debts, it becomes clear that this whole phenomenon raises serious question marks over the sustainability of these policies over time. After all, domestic debt is subject to the scrutiny of the citizens and requires their trust and support, while the ability to incur foreign debt depends on the credibility of the institutions of the indebted countries, i.e., on their real intention, or ability, to repay their debts somehow — this brings us to the meaning of the expression “risky country” —, a fact now reflected in the growing interest rates on capital raised on the international markets (and thus in the cost of each country’s debt).
Most of the European countries thus remain caught between the need to promote economic and production models that will allow them to compete at world level — to avoid economic decline — and the need to protect their respective societies — to avoid growing social disorder internally. But the fact is that these countries, in their desperate attempt to meet the first of these needs, no longer seem able, in the current crisis, to procure the funds required to make the investments they must make if they are to be able, for example, to guarantee the upcoming generations an adequate public healthcare system and an acceptable level of education, pensions and welfare services. And the whole problem is, of course, exacerbated by the aging of the population, which will make the future management of the social security and healthcare system even more difficult.
When one considers the opposing positions in the ambit of national debate on these issues, it is clear to see the level of confusion that abounds. Many strenuously voice the opinion that the welfare state should be dismantled altogether, arguing that it has become a burden on the national economy, does not favour growth and prevents the country’s companies from competing effectively on the global markets, i.e. with the active support of public institutions. Others, on the other hand, believe that since the crisis and its effects are destined to be long-lasting, and will affect the weakest sections of the population most of all, there is a strong argument for strengthening the welfare state, rather than weakening it. But with what resources?[4]
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The European countries are faced with a problem that they cannot resolve using the political and institutional instruments currently at their disposal. In today’s international economic framework, markets are won and retained through the production either of goods at ever-lower prices or of goods with a high technological content. In the first case, the Europeans simply cannot compete with the low wages paid by manufacturers in China, India and the new developing countries. What is more, even China has begun to relocate its production of some goods to African countries where the manufacturing costs can be reduced still further. In the second case, only a few of the European countries, Germany for example, have managed to remain competitive, by innovating, introducing a salary capping policy and improving production capacity.
The current crisis is also highlighting a problem that no European country seems equipped to tackle and resolve successfully: that of unemployment, particularly youth unemployment. Indeed, today’s society, where short-term work contracts are becoming the norm, offers few prospects of stable employment.[5]
In this regard, the Europeans should reflect upon the fact that, as long ago as 1993, Delors, in the white paper Growth, Competitiveness, and Occupation, referred, on the subject of jobs, to the duty to create them in order to guarantee “the future of our children, who must be able to find hope and motivation in the prospect of participating in economic and social activity and of being involved in the society in which they live, and the future of our social protection systems, which are threatened in the short term by inadequate growth and in the long term by the deterioration in the ratio of the people in jobs to those not in employment.”[6] The truth is that over the past two decades, not only has this problem never been seriously addressed, it has actually worsened. Indeed, as Niall Ferguson explains “…today’s generations behave with scant regard for their descendants”. Indeed, they tend to “ignore the problem of future indebtedness, believing that there will be no price to pay for public services funded by borrowing”. In this way they are burdening the next generation with “bills” far greater than recourse to tax smoothing can justify. Because the fact is that each generation’s stock of debt is nothing other than the cumulative sum of the financial transfers that the taxpayers of the past have allowed themselves and their continued borrowing from the taxpayer of the future.[7]
In short, is it still possible, today, to expect Europe’s national economic systems, whose key elements are the state, businesses and families, to continue to operate in the interests of the wellbeing of their respective societies?
At this point it is worth recalling that the sustainability (economic and social) of these systems is based on their capacity to produce goods (material and non-material) through the work of the citizens that live within them, and identify with them. It goes without saying that wherever prospects and opportunities for work decline, consumption levels will also dip and businesses will be thrown into crisis, etc. It is obvious that in such a setting the state will receive less revenue (both internally and from the outside), lose legitimacy and credibility and inevitably end up being unable to guarantee its citizens and businesses adequate services.
So what are the European states doing in a bid to boost opportunities for work and investment at a time in which they are also finding themselves having to cut costs in order to reduce the national debt and “collect money” to fund the services essential to the smooth running of the administrative machinery, transport services and so on?
Preoccupied by the need to balance their finances through reduction of the national debt, and having to strive to remain competitive in a global market characterised by severe imbalances, all the states are actually doing is attempting to rid themselves of the cost of protecting the weaker sections of society (or those with less social or economic bargaining power) and of maintaining a series of public services once considered essential in order to promote socio-economic development but now seen as a burden.
In this context, businesses, too, particularly the large corporations, are increasingly finding themselves caught in the crossfire of global competition and of the confrontation, at world level, between the new global powers. As long as the United States was still able to provide stable government of the international free market economy, they too were able to benefit from the liberalisation of the international and European markets, which allowed the strongest, best prepared and most dynamic players to increase their production and break into new markets. But as soon as America’s power was called into question, this whole framework of reference began to falter.
In Europe the creation of the single currency temporarily mitigated the effects of the void of government that was being created in the world, and in the West in particular. After all, the single currency, by eliminating the problem of fluctuations of the European currencies, made it possible for the national economies to gain stability and allowed businesses to make long-term plans. But the existence of a currency without a state was, and remains, a paradox against which both citizens and businesses, even large corporations, remain unprotected, above all in today’s global era in which, as Robert Reich points out, if there no longer exist “national champions” of industry in the large continental states, what hope of survival can the small states possibly offer?[8]
But the Europeans, in truth, have persistently ignored this reality, continuing to see the national economic framework as a system that must guarantee them, first and foremost, their own survival, irrespective of the fact that, from a production as well as a commercial point of view, the national system is now just part of a network of interconnected systems. We could cite numerous examples in this regard. In Italy, for example, is Fiat a national enterprise? Are its successes and failures Italian successes and failures? It is no secret that this company now manufactures around 70 per cent of its products abroad, or that the Agnelli family is no longer its sole stakeholder. And yet, anachronistically, its future and that of its employees continues to be treated as an exclusively Italian issue.[9]
Conversely, the contradictions that are present in Europe, which condition European debate, clearly derive, above all, from the lack of a European industrial policy in the automotive sector, as well as in other sectors, and also from the lack of credible dealings between European trade-union representatives and a European, as opposed to national, democratic power system. As long as things stand this way, European companies will go on lacking the instruments they need to compete on equal terms in the international arena and trade unions in Europe will be forced, increasingly, to choose the lesser of two evils: either to look on, powerlessly, as the ranks of the unemployed increase, or to renounce the levels of social and economic protection won in the past — two scenarios that, in view of the aggressive development policy undertaken by some of the developing countries, are clearly fast approaching. Federico Rampini, writing in la Repubblica,[10] highlights the significance of “what is now happening in the automotive industry [in China]. The Beijing authorities are about to introduce a new law that will oblige foreign carmakers to divulge their “green” technologies (i.e. details of their electric and hybrid motors) as a condition for retaining their access to the Chinese market. This new law is part of a ten-year plan drawn up by the Chinese industry ministry that aims to see China securing “world leadership” of the field of new-generation zero-emission cars. The government will be able to oblige foreign manufacturers to accept that the local party in any joint venture must hold an at least 51 per cent share of the company capital, thereby ensuring that Chinese industry is included in all the technological innovations developed abroad. From an environmental point of view, this is a positive development, as it provides confirmation of China’s commitment to developing a green economy: in the past five years alone the Beijing government has invested 1.5 billion dollars in this sector. But this “blackmailing” of foreign carmakers is also an indication that China wants to free itself of all forms of dependence on the West. And it has, at its disposal, the instruments of coercion it needs: by 2020 the Chinese car market will amount to 40 million registrations per year, which is twice the level America was recording even before the financial and economic crisis (sales in the USA have now dropped to 12 million/year). Those refusing to accept the diktat to transfer their technological innovations to their Chinese partners will find themselves excluded from the world’s hugest market.”
Clearly, if Europe were to equip itself with a true economic and industrial policy of its own, it would become feasible to change the basis of production relations between Europe and China and to create the conditions for a new development policy.
With the partial exception of Germany, which can still count on exploiting the possibility of expanding into the markets of central and eastern Europe, the European countries, taken singly, seem to be incapable of looking to the future. In most cases, the short-term option most within their reach seems to be, increasingly, that of building a future on debt. However, as Robert Reich recalls, “a correct understanding of the national economy as an area of the global economy” should be based on “a fundamental distinction between investment and consumption, between the amount that is spent to create future wealth and the amount that is spent to meet current needs and desires. Contrary to what is believed by many in government and by the public, this logic actually suggests that there is nothing terribly wrong with nations incurring foreign debts, providing the loans received are invested in factories, schools, roads and other means of boosting future production. Debts become a problem when the money is squandered on consumption.”[11] This, however, is exactly what the Europeans are doing. And this is why it is legitimate to fear that the welfare state, in other words the state that, through its presence in the economy, has previously favoured the maintenance of a more balanced society, is destined for crisis. And a welfare state in crisis will seriously strain the “social contract”, i.e. the pact of social solidarity, on which it is, itself, based.
In actual fact this pact’s chances of survival are now being openly questioned within the European nation-states. But the problem today is no longer whether this pact can be revived at national level, but rather whether it can be revived at European level, where the EU institutions are not only inadequate and incapable of rising to the challenges confronting European society, but also, in the eyes of most people, incapable of being reformed. Because while it is true that European economic integration has advanced a long way, to the point that monetary union is now a reality at least for a group of countries, it is equally true that there is still no European state framework as the setting for a European social-economic system. In short, there is no European federation.
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The possibility of saving the welfare state model in the era of globalisation thus depends on whether or not there exist prospects for creating a European federal framework, starting with the eurozone or some of its key countries. Because failure to create this framework would have two consequences: first, it would move Europe further away from the conditions that are necessary in order to maintain and strengthen the level of solidarity between the different European regions; second, it would deprive the world of a model of reference for the promotion of fairer, more sustainable development at international level, and this is an outcome that would have dramatic consequences, social and environmental. The need to avoid this dangerous scenario is, in itself, more than enough reason, moral as well as political, for striving to re-launch the role of politics in Europe and the project to build a European federal state.
Anna Costa
[1] J.E. Stiglitz, Making Globalization Work, New York, Norton & Company, 2006.The passage here cited is a translation from the Italian version of this work, La globalizzazione che funziona, Turin, Einaudi, 2006, p. XII.
[2] M. Albert, Capitalism against Capitalism, Hoboken, Wiley-Blackwell, 1992. The phrases here cited are translations from the Italian version of this work, Capitalismo contro capitalismo, Bologna, Il Mulino, 1993, p. 132.
[3] As remarked by Niall Ferguson: “Between 1960 and 1992 transfers and subsidies rose from 8 per cent of the GDP of industrial countries to 21 per cent in 1992. […] As we have seen, ahigh proportion of this rising cost was financed by borrowing”, in The Cash Nexus: Money and Power in the Modern World, 1700-2000.New York, Basic Books, 2001; Italian version,Soldi e potere, Milan, Ponte alle grazie, 2001, p. 244. In 1991, in the countries of continental Europe, taxes and transfers of various kinds reduced to a maximum of 5 per cent the proportion of families living in “deep poverty” (op. cit., p. 242.); countries like Great Britain and the USA, on the other hand, record higher rates of poverty.
[4] P. Le Coeur, “Le modèle social freine-t-il la reprise économique en France?”, Le Monde, 3 September 2010. This article compares the socio-economic policies of Germany and France, highlighting the difficulties the French are having getting economic recovery off the ground, their efforts being hindered, in part, “by a social system more protective than those of all the other EU countries”. At the same time, the article underlines how Germany, in the recent past, had already made a series of adjustments to the social state. “Through the Hartz laws, between 2003 and 2005, and subsequently through the Agenda 2000, the Germans reduced the duration of temporary layoff pay, social benefits and health insurance expenditure”. And as recalled by Sylvain Broyer, who is quoted in the same article in Le Monde, “the Germans have reviewed taxation, increased VAT and reformed pensions”. In this regard, it should be remarked that Germany, having started out within the European Union from a position of strength, has maintained this position over time thanks in part to its capacity to exploit the opportunities offered by the process of integration, and that in this setting the changes it has made to its social legislation have allowed it, among other things, to support its companies’ export activities.
[5] According to ISTAT data published on August 31, 2010, the percentage of young people out of work in Europe is 19.6 per cent, and 27 per cent in Italy.
[6] From the introduction to the White paper on growth, competitiveness, and occupation, Commission of the European Communities, Luxembourg, 1993, p. 1.
[7] Niall Fergusson, The Cash Nexus: Money and Power in the Modern World, 1700-2000, op. cit. Italian version: Soldi e potere, op.cit. p. 245.
[8] In 1991, Robert Reich had already drawn attention to the non-convergence of interests between the state and companies, which are often organised in global networks. He had then begun to ask himself, as a US citizen, whether there still existed a national economy and, if there did, in what ways it still met society’s growth and development needs. In so doing, he had highlighted the fact that the very concepts of national enterprise and the national product had largely been superseded: “Nations are becoming regions of a global economy; their citizens are laborers in a global market. National corporations are turning into global webs whose high-volume standardized activities are undertaken wherever labor is cheapest worldwide, and whose most profitable activities are done wherever skilled and talented people can best conceptualize new problems and solutions. Under such circumstances, economic sacrifice and restraint exercised within a nation’s borders is less likely to come full circle than it was in a more closed economy.
The question is whether the habits of citizenship are sufficiently strong to withstand the centrifugal forces of the new global economy. Is there enough of simple loyalty to place — of civic obligation unadorned by enlightened self-interest — to elicit sacrifice nonetheless? We are, after all, citizens as well as economic actors; we may work in markets, but we live in societies. How tight is the social and political bond when the economic bond unravels? The question is, of course, relevant to all nations subject to global economic forces, which are reducing the interdependence of their own citizens and simultaneously separating them into global winners and losers. In some societies, the pull of the global economy notwithstanding, national allegiances are sufficiently potent to motivate the winners to continue helping the losers.” R.B. Reich, The Work of Nations, New York, Vintage Books, 1992. Italian version: L’economia delle nazioni, Milan, Il Sole 24 Ore Libri, 2003, p.371.
[9] As shown by different articles recently appearing in the press on the question of Fiat and its policy to spin off its automotive operations and establish new relations with the trade unions, the latter (with the exception of FIOM) have been seen to be willing to negotiate the standard employment contract in order to keep jobs, with management threatening further relocations of production should its conditions not be accepted. The Pomigliano case is emblematic in this sense. The trade-union victories of the 1950s, 1960s and 1970s risk being wiped out without this producing any strategic advantages for the Italian economy. As E. Scalfari has asked (“La vera storia del caso Marchionne”, la Repubblica,25 July 2010), “Are we, then, rapidly moving towards the cancellation of all the union, socio-economic and market victories won between the 1960s and the start of this century?”
[10] F. Rampini, “L’Asia lancia la guerra delle monete, parte la sfida economica all’Occidente”, la Repubblica, 20 September 2010.
[11] R.B. Reich, op. cit., pp. 320-21.
