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SPEECH/11/695

Mr. László ANDOR

EU Commissioner responsible for Employment, Social Affairs and Inclusion

"Building a social market economy in the European Union"

Manchester Business School

Manchester, 20 October 2011

Ladies and gentlemen,

I am grateful for the chance to speak to you today.

Being back at Manchester University is a bit of a time-warp for me, though things have changed a lot since the days I spent studying at Dover Street, in a faculty with links with such great names in economics as William Stanley Jevons, Sir Arthur Lewis, John Hicks and more recently Joseph E. Stiglitz.

Thanks to the British Council, I came here in 1992, but I am sure this was not among the reasons why Her Majesty the Queen later called 1992 an Annus Horribilis. That was actually the season when Les Miserables was played in The Palace Theatre, and the Cornerhouse cinema showed films like Reservoir Dogs or Death and the Maiden. Arndale Centre was bombed by the IRA, and Eric Cantona came to Manchester from Leeds United.

The primary reason for my arrival was to earn an MA degree in Development Economics, and this was also an opportunity for me to compare the British and the Hungarian academia. One difference was that in Manchester, you could actually pick a course on “models of the socialist economy”. That seemed rather outdated in a period when the eastern bloc was disintegrating and the idea of unfettered capitalism was triumphing there – although not any more in the UK.

In fact, I arrived here just a few days before Black Wednesday, and became a candid observer of the unfolding drama. What I understood shortly after sterling's withdrawal from the ERM was that all this was not purely a monetary phenomenon, but a consequence of a model failure. The free market experiment of the 1980s hit the rocks. But, was there an alternative? The answer in the early 1990s had to be different than in the early 1980s.

Well, this memory about studies in Manchester on economic models in the period just after Black Wednesday ties in well with the title of my talk today, which is “Building a social market economy in the European Union”.

1. The concept of "social market economy"

As you know, the term “social market economy” owes its origin to the post-World War II period, when the shape of the New Germany was being discussed.

The idea was to find a halfway house (hybrid, cocktail etc.) between a laissez-faire market-based economy and one that was centrally planned and State-directed. The Freiburg School’s “social market economy” was the compromise term selected.

The social market economy is based on two clearly distinct but complementary pillars: on the one hand, the enforcement of competition, and on the other, social policy measures to guarantee social justice by correcting negative outcomes and bolster social protection.

It is therefore no coincidence that the “social market economy” should feature alongside the Single Market in the Treaty on European Union.

Article 3 of the Treaty states:

"The Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment."

For me, this encapsulates the essence of three intertwined requirements that the European Union has constantly sought to meet in its efforts to bolster and sustain prosperity.

As a market economy, it harnesses competition to keep prices stable and generate growth and innovation, and is subject to rules to eliminate distortion.

Its social dimension involves the application of rules on working conditions, the introduction of individual and workers’ rights and the objective of full employment.

Its concern for sustainability is highlighted by the idea of balanced growth and the quality of the environment.

The Treaty also highlights the importance of the social dialogue, another pillar of the European social model. Indeed, in the recent crisis years, social dialogue turned out to be an asset and proved its value. It is not just a coincidence, that the best performing member states (in terms of economic growth and job creation), like Germany, Austria, Sweden and the Netherlands, all have strong and institutionalised social dialogue between organisations of business and trade unions.

Ladies and gentlemen,

Today I want to share with you my vision of the “social market economy” and of “the European social model” which underpins it — as an economist, but also as the member of the European Commission who exercises political responsibility for employment, social affairs and inclusion.

The whole European integration process has been based on the forging of consensus between opposing sides in various conflicts and debates. In international relations, a common platform had to be created between France and Germany. In the political economy, a convergence had to be made between capital and labour.

Fundamentally, the introduction of the Common Market, for instance, was a balancing act between the market and the social dimension. But from time to time it comes up against problems and a new balance needs to be struck.

Let’s take the fundamental freedoms brought in by the Treaties. The free movement of goods, persons, services and capital, has been remarkably successful in freeing up trade and tourism within the Single Market. It has also come up against difficulties where continuing disparities and imbalances have thrown up barriers.

Take the social dimension. In this area we have a sound EU framework of rules to protect workers in areas ranging from health and safety at work to worker information and consultation in the event of transfers of undertakings. But,

I have inherited a thorny problem involving efforts to review the Working Time Directive.

Free movement of goods and of services has bolstered trade and increased employment. But, as you know, efforts to extend freedom of movement to services have come up against difficulties with the highly controversial Posting of Workers Directive.

Those two problems — which are underpinned by fundamental questions about utilization of capital and labour and about the role of public authorities in defining the economic model — illustrate the continuing difficulties in completing the Single Market. And they show that, while the Union has been remarkably successful in its work on the Single Market, its legislation at times comes up against the problem of differences in development, prosperity or culture.

Such disparities are a barrier to acceptance — by the Member States, by business or by the people — of further efforts to complete the internal market.

However, I am convinced that the Single Market needs a level playing field to work smoothly, which calls for strong competition and anti-fraud policy. But it also calls for a shared opportunity to reach comparable levels of economic development, prosperity and social cohesion.

2. Tackling disparities

While the European Union has set itself high ideals based on deeply held values such as freedom, human dignity, solidarity and equality, we have to admit that social conditions across the European Union vary considerably; that the disparities within and between the Member States are wide and that the crisis is widening them still further.

To tackle such social disparities, the EU has cohesion policy resources, a large percentage of which is spent on social policy.

The Commission’s proposal for Cohesion Policy instruments for the forthcoming period 2014 to 2020 amounts to EUR 376 billion. That is more than one third of the total EU budget of EUR 1015 billion for that period. The EU’s total resources sound large, but they only total just over or around 1% of GDP.

Effectively tackling economic, social and territorial disparities between EU regions across the 27 Member States would demand financial resources that far exceed our current resources.

By comparison, funds provided by the United States Federal Government that directly assist or benefit the American public in the education, health, public safety, and public works areas exceed $400 billion dollars annually. This means that at federal level the USA spends each year about the equivalent of the funds available to the EU for all Cohesion Policy instruments over the entire seven-year period.

That reflects also the fact that social policy is essentially a Member State responsibility under the Treaties. And the comparison gives a measure of what the EU can do in the social policy area.

Ladies and gentlemen,

The Union has nonetheless set its sights high in seeking to turn its ideals into reality. Most recently, this has taken the form of the Europe 2020 Strategy, which the Commission put forward and the Council endorsed last year.

Europe 2020 aims to achieve inclusive, sustainable and smart growth based on strong social cohesion and equity, environmental sustainability and investment in technological development.

It is no coincidence that the three components I highlighted before — balanced economic growth, social cohesion and environmental sustainability — are at its core.

What is new in Europe 2020 — compared with the Lisbon Strategy that preceded it — is its comprehensive approach to social inclusion, economic growth and sustainable development. In addition, it sets inter-related headline targets for the EU as a whole — to be met by 2020. They involve:

  • raising the employment rate to 75%;

  • reducing the number of people at risk of poverty and social exclusion by 20 million;

  • investing 3% of the EU's GDP in R&D;

  • reducing the early school-leaving rate to under 10% and raising the percentage of the younger generation with a tertiary degree to 40%;

  • meeting the 20/20/20 climate change and energy targets, and raising the cut in emissions to 30% if the conditions are right.

To help meet the targets – which are both ambitious and realistic – Europe 2020 provides for flagship initiatives and mechanisms to monitor progress towards meeting them.

A word about the three flagship initiatives with the strongest bearing on the employment and social area: these are Youth on the Move, An Agenda for New Skills and Jobs, and the European Platform against Poverty and Social Exclusion.

The Agenda for New Skills and Jobs outlines action to improve the way our labour markets function by giving fresh impetus to the flexicurity approach, and through practical initiatives such as the EU Skills Panorama, which will provide information on skill supply and demand.

Youth on the Move seeks to take full advantage of freedom of movement for persons to open up possibilities of finding employment in other Member States. This is of special interest to young people like the students here, who may wish to look for employment experience in another Member State – in particular in times of dramatic levels of youth unemployment in several Member States.

Youth on the Move involves a programme entitled ''Your first EURES job'', which is about helping young people to find a job in any of our 27 Member States.

The European Platform against Poverty and Social Exclusion aims to work for economic, social and territorial cohesion by helping the poor and socially excluded and enabling them to play an active part in society.

It seeks to harness the capacity of all — including civil society representatives and such stakeholders as NGOs, the social partners, local and regional authorities, think-tanks and people experiencing poverty themselves.

Ladies and gentlemen,

Europe 2020 was adopted in 2010 and therefore factors in the impact of the financial crisis and the ensuing economic downturn.

But since it was endorsed before the current wave of national austerity measures in the wake of the sovereign debt crisis, it is worth asking whether its targets can still realistically be met. When counteracting the present crisis, are Member States and the EU as a whole doing all that is necessary to bring about the structural improvement envisaged by the Europe 2020 strategy?

There is no doubt that we are going through the worst economic crisis since the Wall Street crash in 1929 and the Great Depression that followed.

When the financial crisis broke in 2009, the Member States set about averting an employment and social crisis through active labour-market measures and public investment There were some elements of Keynesianism in this effort, but even if a larger aggregate demand stimulus had been undertaken, it could not have been expected to address all aspects of the crisis, which has been at its core one of the private financial sector. Therefore it has been and continues to be key to deleverage, strengthen and better regulate the financial sector.

But, as the recovery came closer, the focus shifted to reducing debt and deficits. This appeared even more compelling as the sovereign debt crisis developed. The Member States are now walking a tightrope between reducing debt and killing growth.

The fact is a new recession is looming, and economic growth is sluggish and very uneven across the Union. Wholesale austerity and excessive spending cuts are not helping in this situation. Let me quote a few facts and figures, which highlight for you the risk that is involved in the current situation:

  • UK unemployment has reached a 17-year high, rising by 114 000 from June to August. The number of unemployed people is now 2.57 million and for 16-to-24 year olds the jobless rate hit a record high of 21.3%;

  • the number of people out of work and claiming benefit in the UK rose by 17 500 to 1.6 million in September;

  • and there has been a record cut in part-time workers, with numbers down by 175 000, and a record reduction of 74 000 in employment of people over 65;

  • the number of children in absolute poverty in the UK is projected to rise by 500 000 to 3 million in 2015. And by 2020, 3.3 million young people – almost one in four children – will find themselves in relative child poverty. This is 2 million short of the 2020 target to reduce child poverty to 10% or less of all children, and represents an increase of 800,000 on the figures for 2011.

This double-dip situation is compounded by the fact that many Member States are concentrating on getting their finances in order and do not find funding for labour market and social investment. But that risks aggravating social inequalities and exclusion.

Taken together, the Member States’ commitments on national targets to reduce poverty and social exclusion in their countries unfortunately do not add up to the EU headline target agreed by the European Council.

What is more, in the current and foreseeable situation, meeting the targets the Member States have set will be even harder, while the corresponding need will be even greater. It is time for the Member States to make good their commitments.

The result is a social time bomb that could explode at any moment. Just think of the strikes we are seeing in so many countries across Europe, the movements like the indignados and Occupy Wall Street, and the riots that have taken place in Greece and this country too.

Of course, the situation in every country is different and I do not pretend the same factors are at work everywhere. But overall what we see is strong popular discontent at the loss of jobs, the cuts in spending, the hopelessness that people see around them. There is also a widespread rejection of what is perceived as a culture of corporate greed.

3. Socially responsible business

Ladies and gentlemen,

It is crucial to respond to this situation and the Commission is keen to do so.

Together with my fellow Commissioners Barnier and Tajani, I will be presenting next week two complementary initiatives that bolster the idea of socially responsible business: one focusing on social business and another on corporate social responsibility — or “CSR” for short.

Socially responsible business stems from a realisation that the economic crisis is not just a crisis of economic and financial management but of ethics too. Such values as solidarity, sustainability, inclusiveness and integrity are not always upheld by business, and I believe our economies have suffered as a result. This is where social business and CSR can have an impact.

Social entrepreneurs strive to make a significant impact on society, economy and the environment. They often act as pioneers in re-engineering supply chains and distribution networks, or developing, promoting and establishing business standards for inclusive and sustainable development.

Although support for social enterprise is primarily the responsibility of local, regional and national actors — and the UK is the leading country in Europe in terms of social enterprise development — I believe that an EU-level Social Business Initiative can help in at least three ways:

  • first, by recognising the role of social enterprises: the Commission will play the role of agenda-setter; it will improve our knowledge of the social enterprise sector, and provide assistance to national and regional actors in raising awareness of — and mobilising support for — social enterprises;

  • secondly, by improving the regulatory environment. The Commission will use its legislative and regulatory powers, in particular as regards EU rules on public procurement and State aid, to create a level playing field for all economic actors, in particular social enterprises; and

  • thirdly, by improving access to funding. Access to finance is crucial to social enterprises’ efforts to develop sustainable businesses. The Commission will therefore use its funding instruments to provide incentives and assistance for setting up, developing, and scaling up social businesses.

It will set up a financial instrument — with an EU contribution of €90 million — to provide social investment funds and financial intermediaries with equity, debt, and risk-sharing instruments for financing social enterprises.

In addition, a new investment priority for "social enterprise" under the new Regulations on the European Social Fund and the European Regional Development Fund will encourage and guide the Member States and regions in establishing targeted action to support social enterprises.

Now, allow me to say a few words about corporate social responsibility. CSR is a process whereby profit-making companies voluntarily incorporate social, environmental and ethical considerations into their business operations and strategy, in close interaction with their stakeholders, and going further than what is required by the legislation and collective agreements.

CSR is an appeal to business managers and their educators to make a genuine commitment to building a better world without forgoing the making of profit.

Two main areas we are working on are the CSR international environment and CSR reporting and transparency.

Internationally, the Commission is particularly interested in examining EU companies' human rights footprint.

I know supply chain management is of interest to you, and we consider responsible management of investments in local communities in developing countries, decent working conditions, and freedom of association to be basic requirements.

We are also interested in encouraging socially responsible investors to provide consumers with better knowledge of what products are made in a responsible way, and enabling public-sector buyers to be better able to include social considerations in how and what they buy.

Business schools should take full account of this. I would strongly urge that management education should stress ethics and responsibility in business.

I hope that the Manchester Business School and other business schools are rising to the challenge of ensuring that tomorrow’s managers recognise the benefits of social responsibility and bring responsible strategies to the boardrooms of the future.

4. Economic and social governance

Ladies and gentlemen,

The developments after the introduction of the euro demonstrated the potential of a common currency to bring about convergence of the Member States’ economies. But we are all aware of the difficulties it is now facing, with a crisis of confidence triggered by a lack of sufficiently robust governance.

That lack of governance is not, of course, restricted to the euro area or even to the EU, since the financial crisis started across the Atlantic. But our regulatory and supervision systems failed to prevent the development of financial sector vulnerability in the years before the crisis, so Europe was hit by this financial crisis very rapidly.

An awareness of the shortcomings of the system goes back a long way. In his excellent biography of Jean Monnet “The First Statesman of Interdependence”, François Duchêne — a British journalist despite his name — writes this of a conversation between Jean Monnet and one of his advisers at the end of November 1955 in the run-up to the Treaty of Rome:

“Is it possible to have a Common Market without federal social, monetary and conjuncture policies? … Monnet thinks it is not”.

Likewise, the weaknesses of the Maastricht architecture of the Economic and Monetary Union have been well-known from early in the 1990s.

It has often taken a crisis to galvanise the Member States into accepting the pooling of more sovereignty.

That crisis has now arrived and we have seen and surely will continue to see great efforts by the Member States to strengthen the euro area’s — and the EU’s — governance.

The continuing resistance to stronger governance that comes from a refusal to countenance more qualified majority voting is a serious challenge that needs facing. It hamstrings action to bolster EU potential to remedy many of the ills that such Member States criticise.

For instance, a financial transactions tax could go a long way to introducing greater governance in the banking system, which has a large responsibility, alongside lack of State monitoring and controls, to bear for the onset of the subprime/sovereign debt crisis.

Conclusion

Ladies and gentlemen,

The increasing disparities within and between the Member States need to be tackled and governance needs stepping up.

The Member States are walking a tightrope stretched between the dual requirements of sustaining growth — however weak — and reducing debt and deficits.

I am convinced that confidence will only return if we do more for investment and growth, and improve the long-term growth potential of the EU economy, also by investing more in human resources.

Stifling growth, which is the only way out of the crisis, would be like killing the goose that lays the golden egg. It would exacerbate social tensions without solving the problem. It would undermine if not destroy the European social model and with it, the EU’s social market economy.

Alongside the Member States' fiscal deficits there is a Europe-wide deficit of solidarity that needs addressing too. Against that background, socially responsible business can make a huge contribution.

Thank you for your attention.


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