The
priorities for European economic policy in the last few years have been to calm
the sovereign debt crisis and to address the fragmentation of the financial
system. But a bigger threat is stalking Europe:
the risk of permanent social fragmentation that might well turn into a revolt
against the political elites and end the support for European integration, open
and global markets and the euro. Trust in the EU and for national governments
has dropped almost everywhere since 2008, most dramatically in Cyprus, Spain,
Greece and Portugal. A
great majority of people – 80% according to Eurobarometer – also believe that
poverty has increased in their own country. More than 6 million jobs have been
lost in the EU since 2008 and material deprivation has increased substantially
in the hardest hit countries, especially among the young.
The situation is not
only appalling in itself and contrary to the goals set out in the European
Union treaty, it is also an enormous economic black hole. Unemployment
undermines growth because of the loss of important skills. In particular, youth
unemployment has a lasting negative impact on productivity, health and
educational performance. The countries of southern Europe and the Baltic states, which were hardest hit by the crisis,
already had high levels of income inequality before the crisis. To compensate
for inequality, some relied on excessive household borrowing. The resulting
debt overhang continues to undermine growth. Policies that address
unemployment, poverty and income inequality therefore promise increased growth,
more sustainable public debt and greater social and political stability.
A
priority is the reform of social security systems. Greece
and Spain used around 16-18%
of their GDP for social protection prior to the crisis, but this reduced income
inequality by only 20% while Denmark
and Sweden
reduced their levels of income inequality by about 45% with the same proportion
of spending. Clearly, significant efficiency gains are possible for the
“Mediterranean” social model, including in France. Other national policies
such as labour market laws also matter for social outcomes, and need continuous
reform. On the composition of fiscal consolidation, the empirical evidence
shows that pensions and spending on the elderly was preserved during the
crisis, while budgets for education, families and children were cut quite
substantially. Reviewing the balance of those spending cuts is indispensable to
reduce the growing intergenerational divide.
A second priority is proper demand
management in the EU. While fiscal consolidation in the EU crisis countries was
unavoidable, no EU policy was put in place to compensate for the drop in
demand. The euro area in particular needs to find ways to increase demand in Germany and
other countries with fiscal space. In the crisis countries, unemployment
benefits per worker were cut and the automatic stabilisers could therefore not
play their full role. To avoid such pro-cyclical fiscal policy tightening, the
EU needs to put in place a fiscal union, which could take the form of a common
unemployment insurance scheme. An intermediate step to increase demand using
European resources could be spending on common infrastructure projects financed
by common project bonds.
by Guntram B. Wolff Finally, tax systems need to be reviewed. In
particular, the philosophy that lower top marginal tax rates result in great
productivity benefits has been proved wrong. Increasing inheritance taxes and
to some extent wealth taxes would allow some of the burden of overcoming the
crisis to be shifted onto those who have been less affected. However, such
policies require European coordination and a European approach to reduce
avoidance via tax havens.
Europe has overcome
the most acute financial crisis. But failure to address more forcefully the
growing social problems will undermine debt sustainability, the future
prospects of a generation and support for one of the most important
cross-border integration projects in history. A social revolt could well undo
globalisation and undermine the basis of our prosperity. |
by Guntram B. Wolff
Read more at Bruegelhttp://www.bruegel.org/nc/blog/detail/article/1326-addressing-social-problems-should-be-at-the-heart-of-europes-economic-strategy
Addressing social
problems should be at the heart of Europe’s economic strategy
- a social revolt could well undo globalisation and undermine the basis
of our prosperity
by Guntram B. Wolff on 7th May 2014
See policy brief 'Europe's social problem and its implications for
economic growth' and interactive map 'Europe’s social polarisation and
the generational struggle'
This opinion has been published in Nikkei, Les Echos, Il Sole 24 Ore,
Handelsblatt, Figelyo and others.
The priorities for European economic policy in the last few years have
been to calm the sovereign debt crisis and to address the fragmentation
of the financial system. But a bigger threat is stalking Europe: the
risk of permanent social fragmentation that might well turn into a
revolt against the political elites and end the support for European
integration, open and global markets and the euro. Trust in the EU and
for national governments has dropped almost everywhere since 2008, most
dramatically in Cyprus, Spain, Greece and Portugal. A great majority of
people – 80% according to Eurobarometer – also believe that poverty has
increased in their own country. More than 6 million jobs have been lost
in the EU since 2008 and material deprivation has increased
substantially in the hardest hit countries, especially among the young.
The situation is not only appalling in itself and contrary to the goals
set out in the European Union treaty, it is also an enormous economic
black hole. Unemployment undermines growth because of the loss of
important skills. In particular, youth unemployment has a lasting
negative impact on productivity, health and educational performance. The
countries of southern Europe and the Baltic states, which were hardest
hit by the crisis, already had high levels of income inequality before
the crisis. To compensate for inequality, some relied on excessive
household borrowing. The resulting debt overhang continues to undermine
growth. Policies that address unemployment, poverty and income
inequality therefore promise increased growth, more sustainable public
debt and greater social and political stability.
A priority is the reform of social security systems. Greece and Spain
used around 16-18% of their GDP for social protection prior to the
crisis, but this reduced income inequality by only 20% while Denmark and
Sweden reduced their levels of income inequality by about 45% with the
same proportion of spending. Clearly, significant efficiency gains are
possible for the “Mediterranean” social model, including in France.
Other national policies such as labour market laws also matter for
social outcomes, and need continuous reform. On the composition of
fiscal consolidation, the empirical evidence shows that pensions and
spending on the elderly was preserved during the crisis, while budgets
for education, families and children were cut quite substantially.
Reviewing the balance of those spending cuts is indispensable to reduce
the growing intergenerational divide.
A second priority is proper demand management in the EU. While fiscal
consolidation in the EU crisis countries was unavoidable, no EU policy
was put in place to compensate for the drop in demand. The euro area in
particular needs to find ways to increase demand in Germany and other
countries with fiscal space. In the crisis countries, unemployment
benefits per worker were cut and the automatic stabilisers could
therefore not play their full role. To avoid such pro-cyclical fiscal
policy tightening, the EU needs to put in place a fiscal union, which
could take the form of a common unemployment insurance scheme. An
intermediate step to increase demand using European resources could be
spending on common infrastructure projects financed by common project
bonds.
Finally, tax systems need to be reviewed. In particular, the philosophy
that lower top marginal tax rates result in great productivity benefits
has been proved wrong. Increasing inheritance taxes and to some extent
wealth taxes would allow some of the burden of overcoming the crisis to
be shifted onto those who have been less affected. However, such
policies require European coordination and a European approach to reduce
avoidance via tax havens.
Europe has overcome the most acute financial crisis. But failure to
address more forcefully the growing social problems will undermine debt
sustainability, the future prospects of a generation and support for one
of the most important cross-border integration projects in history. A
social revolt could well undo globalisation and undermine the basis of
our prosperity. | Read more at Bruegel
http://www.bruegel.org/nc/blog/detail/article/1326-addressing-social-problems-should-be-at-the-heart-of-europes-economic-st
Addressing social
problems should be at the heart of Europe’s economic strategy
- a social revolt could well undo globalisation and undermine the basis
of our prosperity
by Guntram B. Wolff on 7th May 2014
See policy brief 'Europe's social problem and its implications for
economic growth' and interactive map 'Europe’s social polarisation and
the generational struggle'
This opinion has been published in Nikkei, Les Echos, Il Sole 24 Ore,
Handelsblatt, Figelyo and others.
The priorities for European economic policy in the last few years have
been to calm the sovereign debt crisis and to address the fragmentation
of the financial system. But a bigger threat is stalking Europe: the
risk of permanent social fragmentation that might well turn into a
revolt against the political elites and end the support for European
integration, open and global markets and the euro. Trust in the EU and
for national governments has dropped almost everywhere since 2008, most
dramatically in Cyprus, Spain, Greece and Portugal. A great majority of
people – 80% according to Eurobarometer – also believe that poverty has
increased in their own country. More than 6 million jobs have been lost
in the EU since 2008 and material deprivation has increased
substantially in the hardest hit countries, especially among the young.
The situation is not only appalling in itself and contrary to the goals
set out in the European Union treaty, it is also an enormous economic
black hole. Unemployment undermines growth because of the loss of
important skills. In particular, youth unemployment has a lasting
negative impact on productivity, health and educational performance. The
countries of southern Europe and the Baltic states, which were hardest
hit by the crisis, already had high levels of income inequality before
the crisis. To compensate for inequality, some relied on excessive
household borrowing. The resulting debt overhang continues to undermine
growth. Policies that address unemployment, poverty and income
inequality therefore promise increased growth, more sustainable public
debt and greater social and political stability.
A priority is the reform of social security systems. Greece and Spain
used around 16-18% of their GDP for social protection prior to the
crisis, but this reduced income inequality by only 20% while Denmark and
Sweden reduced their levels of income inequality by about 45% with the
same proportion of spending. Clearly, significant efficiency gains are
possible for the “Mediterranean” social model, including in France.
Other national policies such as labour market laws also matter for
social outcomes, and need continuous reform. On the composition of
fiscal consolidation, the empirical evidence shows that pensions and
spending on the elderly was preserved during the crisis, while budgets
for education, families and children were cut quite substantially.
Reviewing the balance of those spending cuts is indispensable to reduce
the growing intergenerational divide.
A second priority is proper demand management in the EU. While fiscal
consolidation in the EU crisis countries was unavoidable, no EU policy
was put in place to compensate for the drop in demand. The euro area in
particular needs to find ways to increase demand in Germany and other
countries with fiscal space. In the crisis countries, unemployment
benefits per worker were cut and the automatic stabilisers could
therefore not play their full role. To avoid such pro-cyclical fiscal
policy tightening, the EU needs to put in place a fiscal union, which
could take the form of a common unemployment insurance scheme. An
intermediate step to increase demand using European resources could be
spending on common infrastructure projects financed by common project
bonds.
Finally, tax systems need to be reviewed. In particular, the philosophy
that lower top marginal tax rates result in great productivity benefits
has been proved wrong. Increasing inheritance taxes and to some extent
wealth taxes would allow some of the burden of overcoming the crisis to
be shifted onto those who have been less affected. However, such
policies require European coordination and a European approach to reduce
avoidance via tax havens.
Europe has overcome the most acute financial crisis. But failure to
address more forcefully the growing social problems will undermine debt
sustainability, the future prospects of a generation and support for one
of the most important cross-border integration projects in history. A
social revolt could well undo globalisation and undermine the basis of
our prosperity. | Read more at Bruegel
http://www.bruegel.org/nc/blog/detail/article/1326-addressing-social-problems-should-be-at-the-heart-of-europes-economic-strategy/
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