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Speech: Promoting social cohesion and solidarity at a time of growing inequalities

Commission Européenne - SPEECH/13/500   04/06/2013

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European Commission

László ANDOR

European Commissioner responsible for Employment, Social Affairs and Inclusion

Promoting social cohesion and solidarity at a time of growing inequalities

Gini Conference /Amsterdam, 4 June 2013

Ladies and gentlemen,

My warm greetings to you all.

I have been following the GINI project ever since it started in London in 2010, so I am glad to be here for the conference that winds it up.

My aim today is to give you a brief account of what our own monitoring of inequality shows, and our impression of the way the situation has evolved since the beginning of the crisis and since the GINI conference in Budapest in March last year.

I will then go on to outline the EU’s response to the situation in the wake of the worst financial, economic and social crisis since the Union was established, and in particular the Commission’s proposals to improve EU social governance.

The analysis presented in our recent reports — in particular the 2012 Employment and Social Developments in Europe review and our quarterly monitoring reports — shows that the crisis has substantially altered the dynamics of inequality and affected different sections of the population in different ways.

Change in median income in bottom and top quintiles from 2008 to 2011 (adjusted for inflation)

A comparison of the development since the outset of the crisis of the median income of the top and bottom quintiles — ignoring the changes in the middle — gives a rather varied picture.

Spain displays the biggest divergence between the top and bottom income groups, with the incomes of those at the bottom declining dramatically.

Lithuania, Ireland, Estonia and Italy follow the same pattern, but on a smaller scale.

In the UK, however, the median income of the top quintile fell more steeply, which suggests that poorer households may have been relatively more protected.

In Latvia, income losses were heavy in both income groups with the decline more pronounced at the top.

In those Member States where real income has increased, incomes grew more in the top quintile, although Poland and Romania are an exception here, along with Austria and Finland.

Overall, the 2008-11 period was one where more countries saw a widening of the gap between the top and bottom quintiles than narrowing.

Impact of austerity on change in real GHDI from 2008 to 2012 by income deciles (%)

We cannot ignore the big role that national fiscal consolidation measures have played.

To analyse the impact of such measures, the Commission has been using the results given by Euromod.

Euromod is a micro-simulation model that allows the impact of changes in tax and benefit systems to be assessed in a consistent manner.

We can thus analyse the impact of such fiscal consolidation measures as:

  • changes in direct tax and social contributions,

  • cash benefits and pensions, and

  • public sector pay,

applied from 2008 to mid-2012 in nine Member States where consolidation measures have been especially far-reaching.

What this analysis tells us is that austerity measures can have a very different distributional impact depending on their design.

Fiscal consolidation measures had a clearly regressive impact in Estonia and Lithuania: the poorest were the worst-hit.

In Portugal and Greece, the burden of fiscal consolidation shows an inverted U-shaped pattern.

It fell more heavily on both the poor and the rich there than it did on the middle-income deciles.

Meanwhile, the change in income in the United Kingdom and Italy was nearly proportional throughout the income distribution.

Finally, in Spain, Latvia and Romania, the better-off lost a higher percentage of their income than the poor, although income in Latvia suffered heavily across the distribution. In this small group of countries one could speak of fiscal consolidation being designed in a slightly 'progressive' way.

However, it is worth bearing in mind that a proportional income fall may actually affect the living standard of those in lower income brackets more severely.

In other words, if a poor person loses 6% of their income and a rich person also loses 6%, the change is tougher for the poor person.

Growing polarisation within euro area

Perhaps the key observation regarding this crisis is the unprecedented divergence in unemployment and other socio-economic outcomes among the 17 countries sharing the common currency.

This polarisation of the euro-area Member States is very different from what happened in the first few years after the euro was launched.

The trend towards convergence in the good years has been reversed during the crisis. In fact, the divergence that emerged during the crisis is far greater than the convergence that has been achieved before the crisis.

The euro area is now, in 2013, in the most vulnerable position it ever was, if you look at the employment and social situation and differences between countries.

The current widening divergence is forecast to peak this year, but it is not at all clear whether and how it will be reduced in the coming years.

A lot depends on policy and on the resolution of the euro crisis.

This growing divide is due to a number of factors, including differences in the macroeconomic context, very different levels of resilience of individual countries' labour markets.

But the key factor is the incomplete character of our Economic and Monetary Union, without any central budget or common growth policy, and without political union. Other aspects of the EMU's systemic design have also played a role, such as the ECB's predominant focus on price stability.

Finally, the very incremental character of Europe's crisis response, which for a long time focused on safeguarding the confidence of financial markets and protecting the creditors rather than re-starting the real economy, has also been an important factor.

The unprecedented divergence in unemployment rates also reflects the huge difficulties facing a number of Member States in finding a new balance and putting their economies on a sustainable footing in the current context of internal devaluation and consolidation of public budgets.

But more than that, this socio-economic divergence represents an unprecedented challenge in terms of keeping the European Union together.

More and more, citizens and politicians are starting to look for solutions that imply disintegration rather than strengthening of the European project.

They feel that Europe has not managed the crisis response well – indeed many things could have been managed better, and the challenge for the EU in terms of collective action has been massive.

But the main worry is that people feel that Europe has not really learned from the outcome of its crisis response so far, and that the euro area will not be able to adjust to the continuing asymmetric shock in a way that would offer the peripheral countries an acceptable economic future.

People fear that there is even more internal devaluation to come.

In a situation where the automatic stabilisation role of our social protection systems has waned or even ceased to apply, there is a clear need for more solidarity between the Member States.

Social protection expenditure rose sharply in 2009 in response to the very serious economic conditions at the time.

But it declined thereafter even though the output gap continued to be negative, largely because the sovereign debt crisis and the absence of fiscal transfers from momentarily stronger to momentarily weaker countries has forced the weaker ones to slash their budgets.

This is markedly different from earlier downturns.

There were about 40 instances in the 1990s and the first decade of the 21st century where the output gap was negative but social protection expenditure remained much more stable.

So what this crisis teaches us is that austerity may have been the necessary response for the short term — given the lack of a better design for Economic and Monetary Union and in the absence of more solidarity — but it has made the crisis worse and it cannot represent the solution for the years to come.

Many Member States still need to consolidate their budgets, but other things need to happen too.

We need to widen our focus to the real economy, and improve the design of EMU, with more solidarity between the Member States and a more symmetrical rebalancing.

Solidarity is also needed to ensure that money saved on cutting public services is not simply handed over to the financial markets in the form of high risk premia stemming from on-going uncertainty about the conditions on which the periphery can remain part of the euro zone.

Financial distress in Austria and Spain

The Commission has been working to improve the timeliness of harmonised EU data of social developments, including reducing the lag in the income data.

Furthermore, responding to the need to monitor the crisis more closely, we have also been looking at timelier supplementary sources, such as the EU harmonised consumer surveys, which give an indication of the most recent situation.

We have regularly published the indicator we call ‘financial distress’, which refers to the percentage of people who have to draw on their savings or go into debt in order to cover current expenditure.

These data confirm a worrying trend in Spain, for instance, where the divide between quartiles is growing and where financial distress in the bottom quartile is approaching an alarming level.

But in Austria, which has been fending off the crisis well, the distress level is not getting worse and remains stable across the quartiles.

Lastly, we should not focus on inequality in income alone, to the exclusion of all else.

The European Central Bank’s recent wealth survey allows us to explore the situation regarding inequality in wealth, and reveals some interesting findings.

Ratio of mean to median wealth

This slide, for example, shows the ratio of the mean to median net wealth figures, which gives an indication of the distribution of wealth within a country.

The higher the ratio of the mean to the median, the greater the inequality in the distribution of wealth.

From this viewpoint, Austria and Germany stand out as the countries with by far the greatest inequality in wealth.

Their ratios are around 3.5 or more, while they are below 2 for most other Member States.

This shows clearly that inequality in income does not give the whole picture, and we need to consider income jointly with wealth.

In the coming months we look forward to making further use of the results of this wealth survey that have become available.

Ladies and gentlemen,

The EU has responded to the growth of inequality by putting forward ambitious policy proposals and stepping up the coordination of economic and social policy.

Europe 2020

Back in 2010 the EU adopted the Europe 2020 Strategy as its overarching agenda for smart, sustainable and inclusive growth.

Europe 2020 has five ambitious EU headline targets, including an employment target to raise the employment rate to 75% of the working-age population and a poverty reduction target for lifting at least 20 million people out of poverty by 2020.

European Semester

Delivering on Europe 2020 calls for a strong, effective system of economic governance, and this is what this Commission has introduced for coordinating EU and national policy action.

One of its key features is the yearly cycle of economic policy coordination known as the European Semester.

The European Semester involves EU-level policy guidance issued by the European Commission and the Council, Member State commitments on reform and country-specific recommendations drafted by the Commission, discussed within the Council and its committees, and finally endorsed by the European Council.

The Member States are expected to take on board these recommendations when designing their structural policies and annual budgets.

The Commission has made its proposals for the 2013 country-specific recommendations just last week, and I will return to them in a while.

Employment and Youth Packages

But besides country-specific guidance, we have also strengthened employment and social policies in the horizontal sense.

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.

In February 2013 the European Council decided to establish a Youth Employment Initiative and earmarked €6 billion to support youth employment measures.

Social Investment Package

In February this year, the Commission adopted a Social Investment Package.

It is based on the idea that the right social policies can help individuals, families and society adapt to such risks as changing career patterns, new working conditions and population ageing, and reduce the need for policy (and expenditure) to remedy those risks. It is based on the idea "prevent and prepare, so that you don't have to repair".

The Package comprises three policy reform strands to help the Member States adapt their social protection systems to the challenges of the 21st century.

The central points in the Package are highly relevant to inequality.

By its very nature, social provision tends to counter inequality.

By making social provision more effective, a social investment approach empowers people — especially those at risk of poverty — and thus tends to reduce inequality.

Rather than waiting for risks to materialise, it emphasises the need to equip people and pre-empting the risks by providing support proactively and at the right moments in their lives.

By way of a practical example, the intergenerational poverty trap is one of the key factors in replicating inequality.

Tackling childhood disadvantage early is crucial avoiding this trap, and ensuring that all people realise their full potential.

This may mean providing accessible quality education or extra-curricular activities.

Measures to improve the family’s economic situation — such as employment support, and adequate child and family benefits — also help forestall the intergenerational poverty trap.

Good-quality childcare and early-childhood education in particular have been shown to have a strong positive impact on children's chances of finishing their studies and finding employment.

They can help children avoid such extreme risks as delinquency and drug abuse later on.

Clearly, increasing early-childhood education attendance and care can benefit people of all incomes, but tends to benefit those who are otherwise less likely to be employed and earn a good income, and are more likely to take extreme risks.

It thus reduces inequality.

Recent evidence shows that investing in children in very early childhood is the most effective way of encouraging social mobility.

This is supported by recent developments in neuroscience, which show the determining influence of investment in pre-school years — especially before the age of three — when most vital cognitive and social skills are formed.

Early childhood appears to be the period when the return on investment in children’s health and education is highest.

The benefits for children with a disadvantaged background are even more marked.

Evidence shows that increasing the duration of pre-primary education by just one year can have a tremendous impact on academic success later in adolescence.

Link between more accessible childcare and higher female employment

Childcare provision is also good for parents.

There is a strong correlation between the employment rate of women with young children and the percentage of women who have access to formal childcare, especially in the first three years of a child’s life.

This graph shows that the higher the percentage of young children in formal childcare, the higher the employment rate for women with young children.

This suggests that making childcare accessible can remove barriers to women's participation in the labour market.

Ladies and gentlemen,

The second priority in the Social Investment Package involves investing in people's skills and capacities to improve their opportunities.

Even in a climate of fiscal consolidation, benefits must be high enough to provide adequate social protection, and they should go hand in hand with accessible, good quality services.

Such services include job-search assistance, training, lifelong learning opportunities, and affordable care services.

But social benefits and services cannot exist in isolation if they are to deal effectively with poverty and a lack of equal opportunity.

The Package therefore also stresses the promotion of inclusive labour markets, so that women, migrants, older people and others all have a fair chance of getting into the labour market and earning a living.

In particular, it urges the Member States to take measures to close the gender pay gap and dismantle barriers preventing women and other under-represented workers from participating in the labour market.

This is both an ethical and an economic imperative.

It is only fair that people should have an equal chance of attaining economic independence and meeting one’s individual aspirations.

And it is vital for reducing poverty, inequality and social exclusion.

Persistence of unemployment and active labour market expenditures

This graph shows the link between overall active labour-market expenditure and shorter spells of unemployment.

But it also shows that expenditure on active labour market policies can yield different results — for example, in Belgium and Denmark.

This may be linked to differences in the labour markets in the Member States, but it may also show that there is room for greater efficiency.

Similar social budgets with very different outcomes

At a time when Member States are endeavouring to make the best use of their budgets, the Package points out that there is room for improvement in the efficiency and effectiveness of many Member States' social policy budgets.

We know that the results of similar budgets often differ widely, as this slide shows.

The Package also emphasises that simplifying benefit administration can save time and money, can make it easier to access support and easier to deal with the individual’s complex situation properly.

This takes us to the next priority in the Package.

Member States need to look at any tax and benefit disincentives that prevent people from finding employment.

This is especially true of tax disincentives for second-earners in households filing tax returns jointly.

Poverty traps should also be addressed — for instance, by progressively tapering means-tested benefit thresholds.

Greater efficiency and effectiveness can also be achieved by ensuring benefits and social services go to the right target groups.

For instance, access to child benefit could progressively be made universal, and some benefits could be made subject to conditions — for instance, unemployment benefit could be conditional on taking part in job training.

The Package provides policy guidance but also emphasises the concrete financial support the EU makes available to put the policies in place.

The key instrument here is the European Social Fund, which has already provided substantial and varied support for reform involving a social investment approach.

For example, it has provided support for social innovation in migration policy in Portugal, helping the long-term unemployed get back into work in Hungary, and supporting the provision of childcare by social enterprises in Italy.

The European Social Fund will play an even bigger role in supporting social investment in the future, by helping the Member States implement country-specific recommendations.

We are also developing operational guidance for the Social Fund to ensure that funding is closely in line with the policy priorities in the Employment, Youth Employment and Social Investment Packages.

From 2014, the Programme for Social Change and Innovation will provide financial support for capacity-building and the testing of new innovative policy, with the aim of up-scaling the most successful measures.

The new Fund for European Aid to the Most Deprived will support national schemes to provide non-financial assistance to the poorest people in our societies through partner organisations. This will build on the current food aid programme, but will go beyond food aid.

The Fund will address food deprivation, homelessness and material deprivation of children.

The Commission will also provide the Member States with support for several capacity-building initiatives and share its analysis and expertise through a new knowledge bank and regular reporting.

One example that will help to reduce poverty and inequality is the drafting of a common methodology for the design of reference budgets.

Reference budgets are a calculation of the cost of a basket of basic goods and services that a family of a specific size and composition needs to be able to live on.

In most Member States, minimum income benefit alone cannot suffice to lift people out of the risk of poverty.

Policymakers can help ensure that income support reflects the real cost of living, and can help to raise people's standard of living so that they live in dignity by using reference budgets.

This will help ensure that minimum income support schemes are adequate.

The coordination of Member States’ social protection and social inclusion policies — what we call the “social Open Method of Coordination” — will be important in implementing the Social Investment Package.

Thanks to this method, policy developments will be monitored, mutual learning and peer reviews between Member States improved, and examples of good practice in national strategic reports identified.

Much of the work is carried out through the Social Protection Committee and its indicators sub-group.

The Social Protection Performance Monitor will also provide support the monitoring of the social situation in the Union.

Using commonly agreed EU social indicators, it identifies social trends and changes that are common to several Member States and feeds into country-specific recommendations.

The Commission’s proposals for this year's country-specific recommendations reflect some of the main points in the Social Investment Package, with the aim of raising the standard of living of the population, alleviating poverty, and fostering inclusive growth.

A larger number of recommendations concern poverty, in particular as it affects children.

This involves, for instance, implementing strategies to alleviate poverty and bolster social inclusion, including recommendations for some Member States to step up the efforts for the inclusion of Roma

Proposing country-specific recommendations that focus on tackling poverty and social exclusion is a reflection of the Commission’s responsibility to monitor the Member States’ efforts to meet one of the Europe 2020 targets. Many proposals for country-specific recommendations also refer to the need to improve the efficiency and effectiveness of social transfers in addressing poverty, while some call for greater adequacy and an increase in the coverage of benefits and greater access to benefits.

But since these recommendations are based on the Annual Growth Survey for 2013, which came out before the Social Investment Package was published, they only reflect the Package’s policy priorities to a limited extent.

Next year's country-specific recommendations will take the Package more fully into account, provided the next annual growth survey reflects its guidance fully.

Consolidating Economic and Monetary Union and its social dimension

Ladies and gentlemen,

The last point I want to raise in terms of governance is the need to consolidate Economic and Monetary Union to give substance to certain Treaty articles.

The Treaty on European Union states that the Union:

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.

That is the issue behind the current debate about the social dimension of closer Economic and Monetary Union and the form it could take.

The Commission has been developing its ideas on the meaning of a deep and genuine Economic and Monetary Union since last autumn.

Proposals we have already made include:

  • a mechanism for ex-ante coordination of major economic policy reforms, and

  • a convergence and competitiveness instrument combining contractual arrangements with a solidarity mechanism for national structural reform.

On 19 June the Commission plans to table proposals to strengthen the social dimension of the EMU, including by strengthening the monitoring of key social and employment challenges that have negative impact on the well-functioning and even the sustainability of the monetary union.

It will aim to set out some modest and achievable ideas for how we could tackle the unprecedented socio-economic divergence I mentioned earlier on.

The key point is that economic governance of the EMU must include collective action to address severe employment and social problems before they develop disproportionately at Member State and euro-area level.

Conclusion

Ladies and gentlemen,

We must work to achieve both economic efficiency and social fairness — without sacrificing either.

Without tackling the serious social crisis that Europe is undergoing, and without rescuing the human capital of millions of people who currently lack any economic opportunities, we cannot achieve a recovery.

So inequalities are not something we should hope to reduce when prosperity returns. Inequalities are something we have to tackle here and now, and we need to put in place social investment that ensures that everyone gets a real chance.

Thank you for your attention.


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