Wednesday, November 26, 2014

Will More Integration Save Europe’s Social Model?

BRUSSELS – At high-level gatherings of the European Union elite, one often hears the following type of statement: “Europe must integrate and centralize economic governance in order to defend its social model in an age of globalization.” European Commission President José Manuel Barroso and his counterpart at the European Council, Herman van Rompuy, are particularly keen on this argument.

But the claim that only deeper EU integration can save the “European” social model from the onslaught of emerging markets is not true. Yes, globalization represents a challenge to all EU member states; but it is not clear how more integration would help them to confront it. More European economic governance is not a panacea.

In fact, it is not even clear which European social model needs to be saved. There are enormous differences among EU members in terms of the size of their public sectors, the flexibility of their labor markets, and almost any socio-economic indicator that one can think of. The common elements that are usually identified with the “European” social model are a quest for equality and a strong welfare state.

But neither of the main problems confronting Europe’s social-security systems – slow economic growth and aging populations (a function of low fertility) – can be addressed at the European level. This is obvious for fertility, which is determined by deeper social and demographic trends that cannot really be influenced by government action. And, while aging could be transformed into an opportunity if the elderly could be made more productive, this requires action at the national and societal levels, not more European integration.

It is understandable that European leaders talk so much about globalization, given that the European economy is rather open for its size, with exports amounting to about 20% of GDP, compared to just 12% in the US. The (re-)emergence of big economies like China is thus bound to have a greater impact on Europe than on the US.

Economists long ago recognized that it is theoretically possible that the emergence of new growth poles abroad does more harm than good to an economy. This can happen if the new economic powers are more important as competitors than they are as customers. But this does not seem to be the case, even with respect to China. The EU does have a bilateral trade deficit with China, but it also exports a lot to the Chinese market – much more than the US does.

More important, even if one accepts the view that globalization constitutes a threat to Europe’s social model, there is little scope for further integration, given that trade policy is already fully unified at the EU level. In any case, the EU has generally contributed constructively to all major rounds of global trade liberalization.

With the EU helping to keep global markets open, European exports have held up rather well, with the EU maintaining its market share. Although it has lost ground relative to the emerging markets (especially China), it has far outperformed other developed economies like the US and Japan. This is true even in services, despite slow productivity growth in Europe. It is thus wrong to assume that economies based on cheap labor are massively outcompeting the EU. Moreover, this relatively good trade performance has been achieved with a much lower increase in wage inequality in Europe than in the US.

The various European social models have thus been, on average, quite robust – most likely because of the absence of a master plan from Brussels on how to respond to globalization.  Each member country has had to adapt in its own way, knowing that it could not bend the rules of the game in its own favor. Not all succeeded; but the successes (Germany, for example) far outweigh the failures (see Greece).

The key to ensuring the future of Europe’s social-security systems, and thus its social model, is faster growth. And, again, it is difficult to see how more Europe would improve the situation. The obstacles to growth are well known, and have existed for a long time without being removed. The reason is quite simple: if there were a politically easy way to generate growth, it would have been implemented already.

Moreover, most national policymakers have a tendency to blame “Brussels” for all of their difficult choices, thus creating the impression at home that the economy would improve if economic affairs could be managed without EU interference. More integration is preached at the European level, but implicitly portrayed at home as an obstacle to growth.

This double-speak on the part of national political elites is perceived as such by voters, whose trust in both national and EU institutions is naturally declining. The claim that Europe needs more integration to save its social model has long lost credibility. Integration is irrelevant to that question, and, in those areas where deeper integration really would benefit Europe, it appears to be the last thing that national leaders want.

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    1. CommentedThomas Brandtner

      The idea that deeper integration inside the EU will lead to more growth can be defended with the following argumetns: firstly, in a number of areas (from spaceflight to airspace control to electronic safety devices for high-speed trains), joint European solutions can be more cost-effective than a multitude of national or regional solutions. Second, there are still a large number of obstacles and administrative hurdles in the so-called "Single Market" which create more harm than good; and third, only through more integration can the EU achieve the degree of macro-prudential stability and shock-resistance wihich are needed in today's dangerous world. I thus respectfully but most strongly disagree with Danuiel Gros: he is mistaken in his blanket denial of the values of more integration for the future of socially inclusive, humane and prosperous societies in Europe (which is what we mean when we talk about the "European Social Model")

    2. CommentedCarol Maczinsky

      Barroso is just a figurehead for highlevel bullshit. What matters is that the governance framework, the ordo, gets strengthened and the "crisis" is instrumental to that. Also freaky governance in the South gets punished. China will sooner or later collapse down, raise tensions with the indebted US and leave a diverse Europe as the power house of the world.

    3. CommentedJohn Brian Shannon

      Hi Daniel,

      It depends upon whom you are asking...

      "Will More Integration Save Europe’s Social Model?"

      Yes, probably -- for the heavily-indebted southern European nations.

      No -- for the northern European nations, such as Germany (let's face it, propping-up other nations is a drag on the German economy), Sweden is economically fine it seems, Switzerland is not dependent upon any support from the southern European nations -- for just a very few examples.

      A great title for an article about the dynamic between southern Europe and northern Europe might be, "Who Needs Who?"

      Best regards, JBS

    4. CommentedStefan S

      While the EU is a great idea, monetary union has proven to be a mistake. Are nations lacking sovereign currencies truly capable of managing their own economies?

      What is the usefulness of the Euro, when payments can be debited electronically, instantaneously convertible between any currency?

      For instance, as things stand now, a Finn can readily use his Euro-denominated debit card to purchase kronor-denominated goods in Sweden. For that matter, an American with a dollar-denominated bank card can do the same thing.

      Why isn't the Euro obsolete in an age of electronic banking?

      Given differences in language and cultural traditions, is a "United States of Europe" really feasible, or even desirable?

    5. CommentedZsolt Hermann

      Although the article uses the word "globalization" several times, it still does not seem that the true meaning of the word is captured.
      Globalization is an evolutionary process, where through multiple factors the whole world, humanity has become an interconnected network, connected, moreover chained together on multiple levels. This is not a process we control this are our new evolutionary conditions we exist in.
      In such a system each and every individual and nation has become fully dependent on others, the whole system.
      Despite this we still look at the system from inside out, trying to achieve solutions, finding answers from subjectively, in a self calculating way.
      None of the economical, financial or social problems can be soled this way.
      First we have to examine the whole system from outside in, understand how the cogwheels connect, what their role and function is, and only such way, always keeping the well being of the whole system as priority can we find solution for anything for social models, fiscal cliffs or the Middle East crisis.
      We have to change the whole paradigm of how we relate to reality, from an individualistic subjective point of view to a systematic, global, objective point of view.
      We cannot change the system, our environmental conditions, but we can adapt to them.

        CommentedEdward Ponderer

        Never in history has the truism, "The whole is greater than the sum of the parts," been truer than now.

        Very insightful Mr. Hermann, very insightful indeed.

    6. CommentedAlexander Stingl

      Daniel Gros first and, for his argument, fatal categorical and conceptual mistake is found in the 'statement' he lays into the mouths of the 'EU elites', a mistake that he, indeed, shares with these elites: In equating 'integration' with 'centralization' (or 'universalization'), Gros and his 'EU elites' manage to hold on to world-views that are easily discredited by the lived empirical realities of actual people(s) around the globe. Equally problematic and combining as a set of corollaries from the first mistake in the wake of this are the following errors in judgment and reason: the reductionist understanding of globalization (to a kind of economic 'globalism' [to refer to a conceptual criticism originally made by Ulrich Beck a decade ago]), the almost naive belief in the myth of eternal growth (growth and scarcity are two artificial vectors that do not adequately represent [forms of] capital and actual resource allocations; moreover, Tim Jackson's notion of the need of "prosperity without growth" refers to far more realistic scenarios), Gros and his 'elites' both use the nation as a basic unit of their deliberations, whether as the concert or competition of nations is not even of relevance, when the concept of the nation-state and the national economy has not the kind of import in the real world that Gros and the 'elites' assert, therefore, and finally, the real epistemic trap, probably, that Gros, like many authors, is caught in, is what Walter Mignolo calls the 'Western colonial matrix'. The challenges of the actually real world, which is not found in the reductionistic 'hard realism' of Western academics and pundits, cannot be adequately represented in the framework that Gros sketches, because he, like his peers, competitors, and 'elite critics' do not think outside the colonial box. Integration that we need is not an integration that can be equated with centralism or universalization. Integration that we need refers to a form of integration that is multiple, pluralistic, heterotopic, and, therefore, actual and real. Instead of retaining categorically and conceptually closed world-views, we need analyses that are opening up the frameworks for ideas that work for and with real people(s) not artificial entities created in a exclusive colonial matrix.

    7. Portrait of Pingfan Hong

      CommentedPingfan Hong

      "The key to ensuring the future of Europe’s social-security systems, and thus its social model, is faster growth": but can an over stretched social security system itself become an obstacle to economic growth?

        CommentedLuca Gemmi

        Economic growth without any (or ineffective) social security system produces inequality, and it could not be an achievement for european governments.

    8. CommentedMatteo Corsi

      Dear Mr. Gross, you eloquently described the vast differences between the various european social models, claiming that, under the current and less than brilliant situation, "More European economic governance is not a panacea. In fact, it is not even clear which European social model needs to be saved."
      I'm not sure if financial, fiscal and monetary governance of Europe is beyond the scope of what you call "economic governance".
      If it's not, I think you neglected to say that the European Union and, in particular, the Eurozone, is at present an inefficient and distorting sum of countries with the same currency but different banking systems, different fiscal policies and extraordinary difficulties to agree on a common monetary policy, as evidenced by the difficulties encountered by the European Central Bank to put in place those tools that, from the beginning, were manifestly essential in order to control the sovereign debt crisis.
      In particular, I think you should have mentioned that, in the current situation, some financially sound countries, with structural trade surplus even in a time of crisis like the present, are benefiting from a single currency that does not increase in price in proportion to the increase of their trade surplus, while others, who have to deal with high public debt, high budget deficits and declining manufacturing sectors that are heavily dependent on domestic demand, can not resort to currency devaluation to regain competitiveness.
      In a currency area (which usually coincides with the boundaries of a country) imbalances of this kind would be countered by subsidies that current European institutions seem unable to timely decide. As for fiscal and wage policies in Germany and the other countries of Northern Europe, they do not seem to be coordinated with those of the countries of Southern Europe and aimed at reducing trade deficits and lack of competitiveness in the South. I don't see how common fiscal policies, wage policies and subsidies could be decided without stronger common institutions and a stronger central governance. In the absence of such institutions the countries of southern Europe are left with the only option of internal deflation which, eventually, demolishes the social systems of these countries (all of them, despite their differencies) without bringing them back to growth. So, is more integration required to save our "quest for equality and strong welfare state"? Well, yes.