May 8, 2014 9:02 pm

EU social welfare: Reforms stretch holes in official safety nets

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On the principle that every crisis contains an opportunity, EU governments are using the continent’s financial and economic troubles as a springboard for restructuring the welfare state, that expensive but seemingly irreplaceable element of modern Europe’s way of life.

The challenge is not only to control costs in the traditionally high-spending areas of pensions and healthcare, but to get to grips with new types of deprivation such as family poverty and long-term exclusion from the labour market.

The stakes are high. Derided by US conservatives and Chinese communists as an inducement to debt and sloth, the welfare state is, for millions of Europeans, a pillar of social stability, a trade-off for capitalism and an element of democracy as essential as free elections and the rule of law.

In March 2012 the raw sensitivities were on full display in Greece. By undertaking the world’s biggest restructuring of sovereign debt, the government dropped a bomb on the welfare state that almost halved the value of assets controlled by pension funds in the form of government bonds to about €10bn. Few actions in Greece’s debt crisis shook society or inflamed the political climate so much.

According to Eurostat, the statistical agency, the EU’s 28 nations spent an average of 29.1 per cent of gross domestic product on social protection in 2011, compared with 26.8 per cent in 2008, the last pre-crisis year.

This increase is little comfort to trade union leaders and other critics who rail that Europe’s welfare reforms are a mishmash of higher retirement ages, reduced state pensions and lower jobless benefits imposed when wages are under pressure and unemployment affects 26m people, or 10.5 per cent of the EU workforce.

“The safety net is still there, but the holes are a bit bigger and some people are falling out,” says Rudy de Leeuw, leader of Belgium’s socialist FGTB union, which claims 1.5m members.

Governments of left, centre and right, in northern Europe as well as the south, observe that such measures are not just an emergency response to the debt crisis, recession and collapse of tax revenues. They are steps necessitated by deep-seated fiscal, social and demographic pressures that threaten, in the absence of reforms, to render a comprehensive, generous welfare state unsustainable in the long run.

The opposing arguments are finely balanced.

Official statistics in Estonia show that 7.3 per cent of the Baltic state’s 1.3m population lived in absolute poverty in 2012, defined as a monthly disposable income of less than €196, and 18.7 per cent in relative poverty, or an income below €329.

Yet government officials say cuts in health insurance costs, lower pension increases and reforms of sick day compensation introduced after 2009 were essential to put Estonia’s public finances, and hence social security itself, on a secure footing.

Italy’s 2011-13 technocratic government, led by Mario Monti, passed a pension reform in 2011 that increased the age and minimum years of contributions needed to receive earnings-related pensions.

The changes, which ensure that from 2015 no workers will qualify until they reach the age of 66, were dictated partly by the need to defend Italy’s eurozone membership.

But they also attempted to address the burden on state finances of an ageing population. On present trends, the proportion of pensioners in Italian public pension schemes, relative to contributors, may rise to 95 per cent by 2060 from 67 per cent in 2007.

Such challenges are visible, too, in Germany. Without large-scale immigration, some commentators predict that longer life expectancy and low birth rates in Europe’s strongest economy will reduce the number of working-age people – who pay the taxes that oil the welfare state – to 36m-39m by 2050 from 50m today.

However, immigrants are indeed starting to arrive in large numbers: net immigration into Germany in 2012 rose to 369,000, the highest level since 1995.

As in the Netherlands and the UK, this has stirred controversy over whether eastern European immigrants enjoy unwarranted access to social benefits – a charge that governments in their native countries indignantly reject.

By raising the numbers of younger taxpayers in work, immigration may ease some pressures on the welfare state. However, in a policy paper published last year, Patrick Diamond and Guy Lodge of Nuffield College, Oxford, said European governments dedicated to welfare reform were still getting their spending priorities wrong.

“This has led to a politics of retrenchment based on cutting and trimming at the edges, rather than determining priorities on the basis of first principles and reshaping the welfare state accordingly,” they wrote.

The electoral clout of the middle classes and elderly means that young, poor and unemployed Europeans are bearing the brunt of welfare cuts, when they ought to be the targets of social expenditure to alleviate poverty and put them into work, the academics argued.

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