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European Commissioner responsible for Employment, Social Affairs and Inclusion
Investing in people is crucial for successful economies
Conference Beyond Recovery: Foundations for Inclusive Growth in Latvia/Riga, 3 June 2013
Ladies and Gentlemen,
It is a pleasure to be here today to discuss with you how Latvia can move towards more inclusive growth.
Broader economic picture
The outlook for the EU as a whole and especially the euro area is worrying and this has had negative effects on inclusive growth and poverty reduction.
Latvia has recovered from a severe recession and experienced high growth in 2011 and 2012. The forecast for 2013 is also positive; predicted GDP growth of 3.8% in 2013 will see Latvia remain among the fastest growing economies in Europe.
Latvian GDP has not yet reached pre-crisis levels but hopefully will get there soon.
Proponents of austerity and internal devaluation refer to Latvia as an example of why such strategies work.
But it is important to underline that this kind of abrupt fiscal consolidation and internal devaluation is not possible in many other countries due to circumstances that are largely specific to Latvia and perhaps the other Baltic states, such as a small open economy and a large degree of public acceptance of austerity measures.
In addition, Latvia has not escaped unscarred from the crisis. Its population has paid a high price. Almost 8% of the population had been unemployed for more than one year in 2012. It will be a big challenge to get these people back into the labour market.
Latvia has also lost a large share of the population to emigration. People left the country due to lack of jobs, sharply decreased living standards and inability to make mortgage repayments. Many of those that have left and those who are still leaving are the young and educated. This will diminish Latvia's future economic potential.
Living standards have fallen dramatically and many households find it difficult to meet their basic needs. Even though fiscal consolidation affected the rich slightly more than the poor, the poor experienced significant cuts in income which had a strong impact on actual living conditions.
Although the crisis had a heavy toll on society in Latvia, Latvia also managed to cushion the impact of the crisis for the poorest to a certain extent.
Firstly, during the crisis, Latvia extended the reach of social security. Secondly, Latvia increased funding for and the coverage of the Active Labour Market policies. This helps the unemployed to stay motivated and keep their skills up to date. Without these measures the impact on poverty and unemployment would have been much worse and consequently the return to growth more difficult.
Country Specific Recommendations
On 29 May, the Commission presented the proposals for Country Specific Recommendations for Member States. Three out of the six Recommendations for Latvia relate to poverty, employment or education.
This shows how the Commission believes in inclusive growth and in the development of human capital as a way to achieve prosperity on a sustainable basis.
Addressing employment and social challenges and investing in people is crucial for successful economies.
The Commission underpinned the recommendations by pointing to the high levels of poverty and income inequality in Latvia:
In Latvia, more than one in three people, or 36% of the population, belong to at least one of these categories of poverty and social exclusion.
Despite high levels of poverty and social exclusion, Latvia spends little on social protection. As a percentage of GDP, Latvia's spending on social protection is the second lowest in the EU. As a result social spending has little impact on reducing poverty.
In the labour market, recent growth has helped to decrease unemployment, including youth unemployment, but the unemployment rate and especially the long term unemployment rate are still among the highest in the EU.
The Commission remains therefore critical noting that there has so far not been major progress regarding social assistance reform and protection of the poorest.
However we also should acknowledge that Latvia has taken other steps to tackle the high poverty levels. The duration of unemployment benefits was increased and Latvia has adopted several measures to help the families with children. We will need to monitor how important these measures to reduce poverty are.
Employment Package, Youth Employment Package and Social Investment Package
Besides country-specific guidance, the Commission has also strengthened employment and social policies in the horizontal sense. The initiatives the Commission has taken could be an inspiration for Latvia to ensure inclusive growth in the years to come.
The Commission’s Employment and Youth Packages issued in 2012 sought to lay down an agenda for a job-rich recovery and boost employment, especially among young people.
The Employment Package advised the Member States to focus on measures to facilitate the matching of labour supply and demand, investment in skills and the completion of the European labour market. It also emphasised the role of demand-side policies, such as hiring subsidies and reduction of the tax wedge on low-paid labour, and the need for decent and sustainable wages.
The Youth Employment Package put forward a proposal for a recommendation on establishing a Youth Guarantee, which the Member States have now adopted, to ensure that all young people under the age of 25 receive a quality offer of employment, continued education, an apprenticeship or a traineeship within four months of becoming unemployed or leaving formal education.
The Social Investment Package was adopted in February. It calls on Member States to prioritise investment in people. Not investing now will lead to much higher financial, but certainly also social costs in the future. The Social Investment Package provides Member States with guidance on how to improve the efficiency and effectiveness of social protection systems and how to modernise active inclusion strategies.
Investing in human capital and social cohesion + EU funds
Besides this guidance, EU funds are available to help Latvia implement the policies that should lead to more inclusive growth. The European Social Fund has greatly contributed to mitigating the effects of the crisis. But I note that at present in Latvia, the European Social Fund accounts for 12.9% of the total Structural Funds envelope which is the second lowest allocation among member states. For the period 2014-2020 Latvia plans a 13.1% ESF share. In light of the magnitude of labour market and social challenges the level of investment through the ESF should in my view be considerably increased in comparison with the 2007-2013 period.
The Latvian economy is in growth mode although output is still far below pre-crisis levels. Serious employment and social challenges remain and inequality is on the rise. It is now even more pressing to make sure that the most disadvantaged are not left behind. As the recent riots in Stockholm have shown, if we don't act to improve the lives of the most disadvantaged in our societies, the consequences can be far-reaching. Economic growth can only be sustainable if it is truly inclusive.