The Covid-19 Wake-Up Call to Brace Social Investment

Barely having had the time to absorb the economic and social aftershocks of the Great Recession, the world is today being confronted with an even more disruptive exogenous shock: the coronavirus pandemic, threatening human lives and eliminating jobs. As the social aftershocks of Covid-19 crisis-management undermine employment opportunities for the Millennials, while reinforcing low-wage stagnation for essential workers, and intensifying work-life balance chores for women, the resilience of the European welfare state is taking centre stage, as it should.[1]

But as obvious as it may seem in the Covid-19-induced context, the reappraisal of resilient welfare provision still comes as a surprise. Ever since the late 1970s, social policy was indeed on the defensive, politically and intellectually. Leading economists tirelessly argued that Europe’s overprotective welfare states, based on high taxes, generous pensions, high unemployment benefits, trade union influence and insider-biased job protection, sowed the seeds of economic and political decline. These beliefs held sway despite the lack of evidence sustaining these claims.

In this blog post, we forward the hypothesis that the Covid-19 pandemic, in line with the Great Recession, has helped further solidify the considerable evidence supporting the (countervailing) claim that social policy can serve as a productive investment in times of uncertainty. We are also progressing towards a more supportive E(M)U macroeconomic environment in which welfare states are able to flourish. We maintain that in recent positive developments there are three inter-related silver linings induced by the pandemic that can be identified: (1) an explicit reappraisal of the competent (welfare) states and resilient healthcare systems; (2) a rekindling of the normative debate over social fairness coupled with an existential awareness of human fragility; (3) the emergence of more effective EU cooperation and (fiscal) solidarity.

The welfare state as the unsung hero of the Great Recession

In the Corona pandemic, public health relief and traditional sick leave and unemployment insurance, subsequently reinforced with more furlough schemes, undeniably played a crucial role in mitigating the impact of the pandemic. As these social programmes stepped into the breach to address the immediate health emergency and to buffer the economic fall-out, they also proved politically effective in helping to ensure social distancing and gain acceptance of lockdown measures. Already the Great Recession showcased the benefits of resilient welfare provision. In hindsight, Europe’s inclusive welfare state really deserves to be considered the “unsung hero” of the Great Recession. Macro-evidence on welfare trends since 2000 clearly reveals that the most inclusive, high-spending welfare states of northern and western Europe cushioned household incomes during the economic downturn in a commendable manner. By contrast, the more segmented welfare states of southern Europe, especially pension-heavy Greece and Italy, were less proficient both in terms of buffering shocks and mitigating inequalities.[2]

What was the key to the success for these countries? From the 1990s, a shift from a predominantly passive welfare state, narrowly focused on here-and-now redistribution, to a more active – social investment-oriented – welfare state, buoyed by a renewed commitment to the pivotal importance of paid work. The crux of this approach is breaking out of the intergenerational transmission of poverty through interventions that help ‘capacitate individuals, families and societies to respond to the changing nature of social risks by investing in human capabilities and skillsets from early childhood into old age, while improving the gendered work-life balance provision for working families. The Covid-19 pandemic has highlighted the fundamental relationship between health on the one side and social and economic participation on the other. Achieving high levels of employment to finance the welfare state requires not only a well-skilled workforce, but also a healthy one. Health risks and job precariousness and unemployment are interrelated. The welfare state not only provides a social safety net to protect citizens against income loss as a consequence of illness - equally important is strengthening healthcare provision and safeguarding physical and mental capacity across an individual's lifespan.

Human fragility, social fairness and secure capabilities

The second silver lining involves the deep sense of social vulnerability that the Covid-19 pandemic generated throughout European societies in early 2020. This awareness of human fragility inspired a rekindling of normative reflection upon ‘social fairness’. The Covid-19 pandemic will surely reinforce the nexus of social disadvantage, accelerated by substantial shifts in economic activity as a result of (less) commuting, (more) working from home, digital servicing and delivery (expansion) and (less) international travel. From a social investment perspective, it is crucial to understand that personal well-being cannot be defined in terms of social (working and living) conditions at any single moment in time. We have to adopt a long-term view regarding the prospects of each and every citizen to sustain their well-being across heterogeneous transitions in their lives.

At the EU level, the renewed interest in questions of social justice from a dynamic perspective can be traced back to the endorsement by the European Council of the European Pillar of Social Rights (EPSR) in 2017. The Social Pillar set out 20 key principles, defined in terms of rights that support and uphold fair and well-functioning labour markets and welfare systems, and covering a well-balanced portfolio of ‘fair-playing-field’ social and employment regulation. From a governance point of view, the Social Pillar constitutes a quintessential EU support structure for (active) welfare states to progress in. Yet so far this new normative framework has been constrained by the 1990s design of the Economic and Monetary Union (EMU) as a ‘disciplining device’ for ‘wasteful’ welfare states.

Towards an EMU ‘holding environment’ for flourishing welfare states?

The third silver lining, the progressive emergence of a new economic governance environment in the EU, may prove to be a game-changer. EMU rules were negotiated at a time when the ‘supply-side’ revolution in macroeconomics was riding high, translating into the ‘no-bailout’ clause and other stringent fiscal rules. With the benefit of hindsight, it is apparent that the euro was heading for trouble. Yet, the very fact that the Great Recession did not end in a deep depression like in the 1930s may be attributed to EU policymakers ultimately daring to depart from the doctrines enshrined in the Treaties.

Inspired by Mario Draghi’s paradigmatic turnaround, and confronted with exploding Covid-19 cases, especially in Italy, Spain and France, the European Central Bank (ECB) under the guidance of Christine Lagarde acted swiftly to contain interest rate spreads across the Eurozone. The real novelty, a force majeure, was EU fiscal policy stepping into the breach at long last. On 22 July, after four days of bickering, EU heads of governments agreed on a EUR 750 billion recovery fund, composed of grants (EUR 390 billion) and loans (EUR 360 billion), largely destined for weaker Member States. The deal is tantamount to an historical breakthrough for the EU as it most notably allows the Union to raise funds in the capital markets to finance EU expenditures.

Squaring the social investment and macroeconomic circle now

Will this be enough? One critical Covid-19 aftershock will be the fiscal footprint produced by all the health-emergency and economic-support measures. High debt levels and deficits will have to be managed over time and many pundits will advocate spending cuts and tax hikes. Social investment reform should be considered as an alternative. At present, low interest rates ease the fiscal burden on short-term investments with longer-term returns, allowing governments to engage in productivity-enhancing measures.

Proposals for greater levels of EU solidarity or to conduct crucially needed reforms in the area of social investment will undoubtedly face (some) domestic resistance. Yet, to the extent that large majorities in virtually all Member States wish to live in a ‘protective’ and prosperous EU, it must surely be possible to convince European citizens that, in an inter-dependent Union, the (market) opportunities of some largely rely on the (welfare) capabilities of others.

How can we align environmental policies and the Social Pillar with the new EMU macroeconomic policy consensus? We concretely propose to discount social investment human capital ‘stock’ expenditures from the fiscal criteria of the Stability and Growth Pact (SGP)[3], thereby enabling countries that are most in need of reform in the area of social investment to secure sustainable financing of their social infrastructures to promote lifelong education and public health systems, without transgressing per se Eurozone fiscal governance agreements.

[1] Esping-Andersen, E.; Gallie, D.; Hemerijck, A.; Myles, J. 2002: Why We Need a New Welfare State, Oxford: Oxford University Press.
[2] Hemerijck, A.; Huguenot-Noël, R. 2020: Who Is Afraid of the Welfare State Now?, Joint Research Centre, European Commission, Brussels.
[3] Hemerijck, A.; Huguenot-Noël, R. 2020: Who Is Afraid of the Welfare State Now?, Joint Research Centre, European Commission, Brussels.
 

Bei dem Beitrag handelt es sich um eine gekürzte Vorabveröffentlichung. Die im Beitrag zum Ausdruck gebrachten Ansichten sind nicht notwendigerweise die der Friedrich-Ebert-Stiftung.