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Commissioner for Employment, Social Affairs and Inclusion
"Europe 2020 as a framework for reducing inequalities and building sustainable welfare states in the EU"
Conference on Inequalities in Europe and the Future of the Welfare State
Brussels, 6 December 2011
Ladies and gentlemen,
This conference has underlined a number of points that are fundamentally important both from the long-term and from the short-term point of view.
Let me start with a few references to what is perhaps the most important, namely the citizens' opinion:
Eurobarometer polls suggest that more than two thirds of Europeans are not satisfied with the way poverty and inequality are handled in their countries.
88% of Europeans think that income differences between people in their country are too large.
85% agree that their government should ensure that the wealth of the country is redistributed in a fair way to all citizens.
And 79% agree that people who are well-off should pay higher taxes so the government has more means to fight poverty.
The crisis of the recent years has no doubt exacerbated the feeling that inequality has increased, and the facts support this perception: Europe has become less equal over the last 30 years, and wealth disparities have started to climb to levels unseen since World War II. The OECD study “Divided We Stand”, which was published yesterday and discussed in several panels of this conference, provides extensive evidence of these developments.
The present crisis is transforming our economies and societies, and the actions we take today will have important long-term consequences.
The European Council meeting at the end of this week will be another important defining moment for the long term.
A key question is whether leaders, besides understanding each other, also understand the markets and the citizens. Because both the markets and the citizens want Europe to unite and to institutionalize coordination and solidarity. Without this we have no chance of restoring the growth potential of the peripheries. Instead, we open the door to more asymmetries, more divisions and more instability.
But there is no quick-fix solution, because we need policy responses that are commensurate with the challenges facing us. We need to base our actions on a long-term strategy.
This crisis is indeed a threat to many people’s well-being over both the short and the long term.
The year 2011 in many ways further deepened the social damage that developed through 2009-10. We have more long-term unemployment, greater risk of poverty and increasing challenges to social cohesion.
The best we can make out of this situation is to take it as an opportunity that forces us to consider the most important social and political issues and weigh up all options.
The crisis requires us to have another look at where we stand on basic questions of political economy.
The subject of this conference — how to distribute income fairly and maximize overall well-being in the society — is perhaps the key question.
It has been around since ancient times and it is no less relevant today than it was, for example, at the time of the French Revolution.
John Maynard Keynes put it this way: The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.
That is as true today as in 1936 when he actually said it.
Need for a new model: Europe 2020
It means that we must learn from the past and drop practices that have proved not to work.
The European Union needs to find a model for its development that both galvanises the economy and fosters social progress.
A model adapted to today’s global economy, and one that brings us closer to achieving our goals of solidarity, fairness and sustainability.
Europe is of course not the only continent facing the challenge of how to enable every human to contribute to creation of prosperity and benefit from it. The work which was undertaken this year within the G20 on the social dimension of globalization is therefore enormously important and we have to make every effort to advance it further.
I would argue that the EU does have a clear blueprint for a socio-economic model where economic dynamism and social progress reinforce each other. It is the Europe 2020 Strategy.
This is the Union’s first long-term strategy that tackles the economic, environmental and social challenges head-on and comprehensively, with commitments and targets for improvement on all these fronts.
At the core of Europe 2020 is the conviction that the EU’s economic success and prosperity depend not only on short-term factors like cost competitiveness, but also on longer-term factors like the quality of our human capital, environmental resource efficiency, and social cohesion.
Why should inequalities be reduced?
But why is pursuit of the Europe 2020 relevant for tackling inequalities? And why is it necessary?
Inequality to some extent reflects the fact that we are all different and we behave differently too. So individual socio-economic outcomes will also be different.
Over-aggressive action to reduce inequality could undermine economic efficiency – as there always needs to be a good balance between saving and consumption, between capital and labour, between motivation by profit and necessary redistribution.
But the threat we face now is not too low, but rather too high inequalities. And besides economic efficiency, one has to consider social efficiency too.
The current level of inequalities in Europe by definition means that there are inequalities of opportunities and that social mobility is severely constrained.
Therefore we have to ask ourselves whether we are doing enough to bring inequalities back to their reasonable limits and whether we are even doing enough to prevent them from increasing further.
Europe 2020 is essential in this context as it focuses economic and all other policy on five key measurable targets, of which one concerns an increased level of employment, one pertains to improved educational outcomes and one focuses on reduction in poverty and social exclusion. It gives Europe a long-term strategy that it needs in the present crisis.
There is a strong economic and social rationale for mitigating inequalities. Sharing the benefits of growth more fairly bolsters the collective good, prevents social conflicts, and strengthens public cooperation and trust. Growth cannot be smart and sustainable without being inclusive.
Sharing resources permits the pooling of some of the risks that individuals need to take to engage in productive activity and acquire skills.
Mitigating inequalities is also necessary to prevent poverty and social exclusion, which carry a high economic and social cost.
And on the macroeconomic level, excessive income inequalities resulting from accumulation of capital in the wrong places can stifle aggregate demand and actually decrease the returns on capital.
Ladies and Gentlemen,
Over the last two days, we have seen that various policy tools can and ought to be applied to mitigate inequalities.
Allow me to elaborate on three areas of action: labour market policy, tax policy and regional policy.
Labour market inequality
Even before the crisis, European labour markets have seen increasing inequalities in terms of both wages and contractual arrangements.
In order for people to engage fully in wealth-creating activities, we must make sure that those who make a contribution are rewarded. But is a bank’s chief executive officer really creating 20 times more value for society than a prime minister, and 300 times more than a cleaner?
Are such differences really needed to motivate and reward performance and to increase economic efficiency? I doubt it.
On the contrary, large wage inequality can destabilize economic performance. At the company level, excessive remuneration of executives, especially if it is based on short-term results, creates perverse incentives and diverts efforts from what should be the main focus, namely sustainable maximization of production that corresponds to the needs of customers.
On the macroeconomic level, Joseph Stiglitz as well as the International Monetary Fund have shown that large differences in income make economic growth fragile as the largely unspent salaries of the very rich are increasingly recycled into loans to the poor, creating financial instability.
Many of the solutions lie in the areas of taxation and financial regulation, but labour market policy also has an important role to play.
Active-inclusion policy helps inactive and discouraged workers to acquire skills and get back on the labour market.
Training programmes for the unemployed help low-income individuals to create more value added for society and their employers, and to obtain more market income.
In fact, the recent increase in female employment has had an important positive impact in terms of mitigating inequality in earnings.
Such efforts to increase employment should really cover all social strata.
Increasing employment contributes both to economic growth and to mitigating inequality. But we must not forget that what is needed is not just jobs, but jobs that pay.
One of the paradoxes in the EU’s employment growth in the decade before the crisis is that it did not help to reduce poverty.
In some countries at least, the explanation lies in the type of labour market reforms conducted. These were geared to reducing reservation wages by reducing benefits or increasing their conditionality. Labour market segmentation has also played a big role as temporary contracts carry an average wage penalty of around 14%.
Increasing incentives to take up employment, linking benefits to activation and enabling flexible forms of employment are useful measures, but they must not be pursued in isolation.
We must really make sure that poverty is reduced – and besides labour market policy, taxation is another crucial tool for this.
In the introductory video of our conference yesterday, Professor Romain Rancière called taxation the most effective tool for reducing inequality.
Taxation is certainly a powerful tool for redistributing income, but it has become less effective since taxes on capital and on high income have declined.
Fairness and fiscal consolidation both call for higher taxation of higher incomes and wealth. It is not right that the effective tax rate on those at the top should be lower than that of their poorer compatriots.
Wealth is distributed much less fairly than income. But wealth is rarely taxed, and constitutes an important potential source of tax revenue.
While the richest 1% in the biggest European countries own about one quarter of all assets, the bottom 50% own much less than one tenth. At the same time, Europe still has a long way to go in reducing the tax wedge on low-paid labour.
Tax systems should stimulate productive activity and creation of prosperity, but that is not the same thing as extraction of rent from already existing assets.
We need to look whether we have the right balance and the right targeting in the taxation of labour and capital.
Thirdly, we have to address geographic inequalities, both between and within regions. Persistently high regional inequality undermines the Single Market. Under-utilization of the economic potential of peripheral areas aggravates economic imbalances as well as social tension.
It is therefore good news that income differences between regions have recently been declining across the EU. But the differences are still enormous and we must also look at internal peripheries, such as declining urban or rural areas.
Human capital investment is a key tool for improving our economic situation and meeting Europe 2020 targets for employment, education and poverty reduction.
The Commission has therefore proposed that the European Social Fund be increased by 7.5% for the period 2014–2020, amounting at least to a quarter of cohesion policy funding. This should indeed be seen as the necessary minimum.
We have also proposed that the percentage devoted to social inclusion should be increased to 20% of the Fund, as compared with 13% at present.
Ladies and gentlemen,
I want to thank you all for contributing to the important discussion we have had over the past two days.
If we are to deal with a phenomenon as multifaceted as inequality, we need everyone to contribute.
We need to consider state-of-the-art academic research. Data on the social situation is normally available only with a certain delay and we cannot always be as precise as we would like to be, but as Keynes is also reported to have said, it is better to be vaguely right than precisely wrong, and this should be kept in mind in the current debate on economic and financial issues.
We need to build on the Member States’ best practice and on the social partners’ capacity to identify solutions that strengthen the collective good in the interest of all parties.
And all the European Commission services concerned need to be mobilised to make sure that our work contributes to inclusive growth in the Union.
Inequality conceals a multitude of problems. Growing income inequality undermines cohesion and trust in society.
Large income differences also eliminate opportunities in education and employment, wipe out social capital, disconnect people from the democratic process and, in the worst-case scenario, foment social unrest. None of that is good for society and for the economy.
We cannot create an inclusive and stable society and sustainable economic growth unless we tackle inequality.
Sometimes confusion arises but that is indeed why we have conferences, to use them for clarification of ideas or concepts.
The idea of the European welfare state, for example, is certainly not one of over-consuming present income and discouraging entrepreneurship. It is one where a decent level of social well-being provides confidence and creates economic opportunities. Redistribution and social investment are key drivers of economic sustainability.
It is encouraging that Europe, and in particular the monetary union, responds to the present crisis by moving in the direction of strengthening economic union and creating fiscal union. We need a European solution. But as we are weighing the options in designing a new institutional framework for economic policy, we must make sure that the solution includes two important elements:
First, an economic union must be geared towards building productive capacity and strengthening the growth potential not only in the centre but also in the periphery. This requires, among other things, investment in human capital.
Second, any fiscal and economic union must be underpinned by social fairness, enabling to build social trust. This is pre-requisite for economic performance.
We must hold to Europe 2020 and its target of a society where more people contribute to growth and "the benefits of growth are widely shared". That cannot be achieved in a society where there is too much inequality.
There are social and political limits to inequality, and if economic policies are perceived as being unfair, millions may take to the streets to express their anger. As they have started to do already.
Budget consolidation, which is inevitably on the agenda these years, must be fair, and the burden must be shared, taking account of the individual’s ability to contribute.
We have seen that it is possible to reduce inequality and promote economic growth at the same time. And a crisis is exactly the time to call for more solidarity.
We should all focus on such action in the implementation of the next European Semester and in thinking about the future of European integration.
Thank you very much for your attention.