Does the implementation of the Lisbon Agenda bring about a ... · 2 The evidence on pensi on reforms in the FRDB database n s cial reforms has to be i terpreted with caution, the

ECPR Joint Sessions of Workshops, Nicosia 25 – 30 April 2006 Workshop 1:

EU Social Policy: Europeanization or the Persistence of National Differences (Directors: Karen Anderson and Wolfgang Lamping)

Does the implementation of the Lisbon Agenda bring about a European Social Model?

Preliminary draft, comments welcome. Waltraud Schelkle European Institute London School of Economics and Political Science London WC2A 2AE Tel: +44 20 7955 6942 [email protected]

1 Introduction A ‘European social model’ is typically referred to as a villain to be locked up or as an endangered species dying out but never as something that has a future. Yet, both the fierce critics and the anxious fans of the European social model address only specific institutionalisations of the welfare state in continental Europe, such as forms of employment protection or the generosity of benefits. These institutionalisations characterise existing families or worlds of national welfare states but not necessarily a European social model. A social model as I will understand the term here is about the political norms and economic functions that a certain welfare state arrangement satisfies primarily. Institutionally, the arrangements may look rather different even though they are manifestations of the same model, insofar as they are functionally equivalent and borne by the same norm. Historical trajectories or institutions like the electoral system may count for these institutional differences. We can identify social models in times of reform when there is a need for guidance and for justification of abandoning the status quo. The unity of a European model, if discernible, would derive from the functionalist, technocratic-normative consensus that social policy in the EU polity has a particular problem-solving role for the economy. The Lisbon Agenda explicitly states that social policy has to serve competitiveness and flexible adjustment of integrating economies and that reform should realise the potential of ‘social policy as a productive factor’. One way of analysing whether the Lisbon Agenda makes a difference to national welfare state transformations is to study reforms that are at its core, namely those supposed to make labour market regulations and tax-transfer systems more employment-friendly. If

Lisbon Agenda Waltraud Schelkle

these reforms go against the momentum of the existing national models, such as income stabilisation or basic safety while reflecting a consensus of ‘social policy as a productive factor’, we can interpret these reforms as welfare state transformations that bring about a European social model. Specifically, I will look at reforms of employment protection and unemployment benefits undertaken since the late 1980s in four member states (Germany, Greece, Sweden, United Kingdom) which have quite different institutional setups of social policy. The empirical question is whether there is a convergence of the norms and functions of social policies across these countries which can be related to the implementing of the EU’s social policy agenda. The answer to the title question that results from this empirical analysis is a qualified ‘yes’: A European social model (ESM) has become conceivable although it is far from certain to emerge. Obstacles to the emergence of an ESM are both economic and political. First, the institutional shift from ‘social policy as effective income maintenance’ or ‘as a basic safety net provider’ to ‘social policy as a productive factor’ has economic costs in terms of effective stabilisation and universal coverage. Second, the problem-solving legitimisation of social policy coordination is a political liability for European integration if reform efforts are not rewarded as promised by an increase in trend growth and social partners get a less constitutive role in reform processes. Policymakers may therefore refrain from further moves towards an ESM based on the ‘productivist’ Lisbon consensus. The paper proceeds as follows: The next section outlines that there is mounting evidence for the reform record of EU member states being better than both expert opinion and popular belief have it. The third section will argue that this positive effect of EU membership on reform activism is more likely to stem from soft policy processes such as those under the Lisbon Agenda than from the classical Community Method of integration or mechanisms of federalist state-building. Then I will provide mixed evidence for the emergence of a European social model. The fifth section investigates the reasons why the evidence is mixed before the conclusions sum up.

2 The reform record in EU member states The popular notion of ‘Eurosclerosis’ makes one wonder whether there is enough change going on in EU member states to make the emergence of an ESM at least possible, if not actually happening. For an assessment, I draw on evidence provided by economists at the IMF, the OECD and the Fondazione Rodolfo Debenedetti (FRDB) at Bocconi University; these economists are not inclined to play up the EU’s reform record but have been and are still rather critical of welfare state arrangements in continental Europe. A good starting point is the study by IMF staff, published as chapter 3 in the Economic Outlook 2004, on what fosters structural reforms in industrial countries (IMF 2004a: 113). The study identifies EU membership among the statistically significant determinants of structural reforms in different areas (table 1). Since a positive effect is particularly noticeable with respect to trade liberalization and product market regulation,

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the authors suggest it is the openness that comes with EU membership that forced countries to reform. The effect on labour market reform is also positive although the empirical basis for this claim is rather small.1 Table 1: Effect of EU membership on reform activism Reform in: Labour

Markets Product Markets

Financial Markets

Taxes Trade

Statistically significant effect

positive

positive

none

negative

positive

Source: IMF (2004a: table 3.3) This calls for a closer look at labour market reforms which are the core of the Lisbon Agenda (figure 1). The following graphs are taken from OECD publications that re-assess its Jobs Strategy which called for a bold liberalisation of labour markets in order to tackle unemployment. These studies show that ever since the OECD Jobs Strategy was launched in 1994, EU member states have been more active in reforming their labour markets than the OECD on average. Even the big bad boys, Germany and Italy, cannot be accused of lagging behind in reforms. That holds after the majority of member states joined EMU, even though this weakened the intensity of reforms compared to EU members like the UK that did not join the monetary union. One explanation is that EMU member states spent their ‘political capital’ in the run-up to EMU where they felt under pressure to both deregulate and tighten the fiscal belt at the same time. Given this evidence from two independent sources that are not suspicious of letting EU welfare states easily off the hook, one wonders why there is still the widely held view of reform inertia in the EU. To some extent, this impression is created by a circular argument: since trend growth of the EU as a whole has not risen and caught up with the U.S., reform cannot have gone far enough. Obviously, this ignores the variety of growth experiences in the EU and takes the slow growth record of Germany, Italy and France as representing the EU. It also ignores other plausible explanations for the slow growth of the big three than lack of reform. On the other hand, governments do indeed not what economists tell them to do, to their constant surprise and dismay, namely reduce employment protection and the generosity of non-employment benefits in a straightforward way (table 2).

1 This was pointed out by Werner Roeger (DGEcfin) in his comment on Xavier Debrun (IMF) at a European Commission workshop on ‘Structural reforms and macroeconomic performance’ in November 2005.

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Figure 1: Intensity and timing of labour market reforms in the EU, EMU and OECD: percentage of maximal score (Duval and Elmeskov 2005: figure 4)

Table 2 below shows that reforming governments engage in a strategy of ‘two steps forward, one backwards’ with respect to non-employment benefits and even ‘one

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forward, one backwards’ with respect to employment protection.2 Thus, EU countries exhibit a comparatively high degree of activism that is increasing over time but there is no one-dimensional thrust of reform, except for a decline in generosity as regards non-employment benefits (such as early retirement or social assistance). Table 2: Labour market reforms in Europe over time

Source: Boeri (2005: table 1) One interpretation of this uneven reform record is that political exchanges take place: a slashing of transfers is compensated by more protection for insiders of the labour market (Fatàs et al 2003: 38-40; Saint-Paul 2004: 13-16; Castanheira et al 2006: 12-14). This makes for little net change in overall indices of labour market reforms although there is considerable restructuring going on. However, the result of this restructuring may be paradoxical and counterproductive, namely entrench insider-outsider relationships in labour markets by liberalising contracts and lowering benefits only for those marginally employed or out of work (Brandt et al 2005: 63-64). Governments may thus end up creating exactly those insider-outsider labour markets that they have been urged to reform by the OECD Jobs Study.3

3 The Lisbon Agenda as a reform lever The emergence of a European social model in the sense I use the term here can be understood analogously to the evolving Maastricht consensus on macroeconomic management that McNamara (1998) traced. It would constitute a shift in the norms and beliefs of policymakers about the priorities of social risk management. McNamara’s study claims that it required the simultaneous occurrence of three circumstances in the 2 The evidence on pension reforms in the FRDB database on social reforms has to be interpreted with caution, the classification as decreasing or increasing generosity seems not consistent to me. However, Castanheira et al (2006: 13, fig.2.5) reach the same conclusion, namely that there was no discernible thrust in marginal pension reforms. 3 Reform-minded economists seem to have become aware of that and find strong, encompassing unions helpful for constructive labour market reforms (IMF 2004b: par.113; Castanheira et al et al 2006: 48). The European Commission has also noticed this problem and makes an attempt in its newly established labour market reform (LABREF) database to take the quality of reforms such as the targeting of outsiders and the participation of social partners into account (Arpaia et al 2005: 11, 17).

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late 1980s/ early 1990s that were not met in earlier attempts to bring about monetary union: (a) the perception of a crisis that requires fundamental change in macroeconomic management, (b) an alternative conceptualisation of macroeconomic management which was available in the disguise of monetarism, and (c) a role model that assures policymakers that a monetarist macroeconomic regime can actually work which was provided by Germany. The constructivist nature of this Maastricht consensus, fully endorsing McNamara’s approach, is revealed by what we now know: OECD countries took quite different approaches to deal with the crisis of the post-Bretton Woods era and recorded varied success; the monetarist credo became unfashionable soon after the worst was over in the 1990s when policymakers, in particular central bankers, became pragmatic again; and Germany’s post-war success story is at least as well explained by a Keynesian account, for instance pointing out that a stability-oriented monetary policy can be a successful demand management strategy by securing the macroeconomic conditions that favour export surpluses and low interest rates. Do analogous circumstances characterise the situation of welfare states and social policy in the European Union? I would argue they do: (a) A sense of crisis and wide-spread concern about ‘Eurosclerosis’ sparked the ambitious Single Market Programme in the 1980s; the persistence of high unemployment rates despite an improvement in GDP growth made governments ready to accept the Lisbon Agenda which, after all, amounted to institutionalising a potentially embarrassing benchmarking exercise and a regular, fairly intrusive peer review. (b) Conceptualisations underlying the policy manifestos of the ‘New Democrats’ during the Clinton administration and of ‘New Labour’ under the Blair-Brown government support a new approach to social policy and reform (Giddens 1998, Novak 1998). The ‘Third Way’ promises to serve the traditional concern of social democrats for high employment and protection of workers with non-traditional means, namely supply-side measures and microeconomic management to boost both the available quantity and the resulting quality of jobs.4 (c) The stunning economic performance of both the U.S. under the Clinton administration and the UK under the Blair government, with high employment-intensive growth and no recession over a full decade, suggested that the ‘Third Way’ is able to deliver a superior policy package for post-industrial, open (‘globalised’) economies. This was particularly important for governments of large, economically and politically heterogeneous countries that cannot easily take the Scandinavian welfare states as role models. What then is the content of this European social model that the Lisbon Agenda projects? The report of the High-Level Group on ‘the future of social policy in an enlarged European Union’, published in 2004, summarizes the consensus thus: “Despite the diversity between national systems, there is a distinct European social model in that all national systems of EU countries are marked by the consistency between economic efficiency and social progress. The model requires a developed insurance component. At the same time, the social dimension functions as a productive factor. For instance, good health or good labour law partly accounts for good economic results.” (Directorate 4 The work of academic economists such as Tony Atkinson (Oxford) and John Hills (LSE) in the UK, or Rebecca Blank (Michigan), Richard Freeman (Harvard) and Robert Reich (Berkeley) in the US represents this new consensus.

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General 2004: 21)5 This Lisbon consensus, the explicit aim of which is to modernise or ‘adapt’ European welfare regimes, proposes that social policy has to be a dynamising force, activating all members of society and operating as a ‘productive factor’ for the economy. For instance, it tries to achieve a ‘universal (or adult) breadwinner’ model by stipulating explicitly a female employment rate of 60% in all member states by 2010.6 Thus it tries to promote equal opportunity and social inclusion primarily by making labour markets more absorptive (low entry wages for the unskilled or untrained, flexible working conditions for adults with carer responsibilities) while at the same time proposing to target benefits more tightly to outsiders of the labour market, to low wage earners and to families. Why may the soft coordination of reform policies under the Lisbon Agenda be more effective than the Community Method of harmonising ‘hard law’? This is a particularly pertinent question in light of the evidence that Gerda Falkner and collaborators have painstakingly assembled, showing that there is a steadily increasing stock of binding and non-binding measures in EU social policy (Falkner et al 2005: ch.3; fig.3.7). Ever since the mid-1980s, Regulations/ Directives/ Decisions and Recommendations/ Opinions, respectively, have grown in tandem. The authors thus reject the verdict that the Community Method, with the European Court of Justice and the Commission in the driving seat, is not working in social policy integration and their study seriously qualifies the idea that soft, open or ‘neo-voluntaristic’ methods of social policy coordination are the only way forward for Social Europe. While I have no reason to doubt the findings of Falkner et al (2005), I would still maintain that the Community Method cannot be the main channel for ‘Europeanisation’ in member states. My argument is twofold: First, the Community Method reaches directly only the regulatory part of European welfare states. This is a most relevant part of social policy7 and perhaps increasingly so if governments keep on using more private sources of welfare provision. But it is only a part and, I would argue in line with the ‘regulatory state’ interpretation of the EU (Majone, Moravscik), it is the largely invisible, politically less salient dimension of welfare state arrangements. There is also little evidence for sweeping indirect effects, such as a race to minimum regulatory standards or rampant tax competition and corresponding pressures for reducing social expenditures due to the pro-free movement bias of the Treaty and the Court’s interpretation of it. This is to some extent surprising because under conditions of ‘permanent austerity’ (Pierson 2001) governments should have strong incentives for engaging in a race to the bottom. 5 Available at: http://europa.eu.int/comm/employment_social/news/2004/jun/hlg_social_elarg_en.pdf 6 Modernization could also have meant to go for a ‘universal care-giver model’ that allows women and men to share equally the duties of parenthood or longterm care for dependent family members (Ostner and Lewis 1995, Threlfall 2002). Needless to say, the extensive Lisbon Agenda contains guidelines asking for improved child care and leave arrangements, but this is more part of the general objective of equal opportunity, not a headline indicator like the 60% employment goal for women. It has to be said, however, that governments responded to the guideline on child care and parental leave more attentively than to other equal opportunity goals (Rubery 2005: 401). 7 Social policy experts like Jane Lewis and Lutz Leisering think that the regime classification of Esping-Andersen (1990) implodes if one takes regulatory social policy into account.

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But these doomsday scenarios neglect the constituencies of the welfare state which are a strong safeguard for the status quo. It is here, second, where the Lisbon Agenda or any peer review method comes in: it creates an alternative, pro-reform constituency that is based on advice from the ‘experts’, as a counterweight to the (perhaps not so special) interests of stakeholders or to traditional ideological positions. The softness or non-binding character of coordination allows governments to give the EU level a supervisory and evaluating role in social policy areas that are taboo for the Community Method, such as labour taxation or wage contracts. Moreover, the tedious process of drawing up ‘National Action (now: Reform) Plans’, gives governments an instrument to put political pressure on their welfare bureaucracies if they so wish. The inertia of administrations can be a major obstacle to change.8 But administrations can always claim, for good or bad reasons, that certain hard law measures can only be implemented with great technical or legal difficulty, confronting politicians with objections based on their professional expertise. By contrast, it is not easy to avoid all political blame if a welfare state performs conspicuously badly on indicators such as child poverty or longterm unemployment if other, comparable, countries do better. The headline benchmarks are, after all, chosen by the political masters. Their focus on outcomes does not make them particularly pertinent instruments for learning and policy transfer (Mabbett, forthcoming), yet the Lisbon indicators can be used for signalling to bureaucrats that the government wants them to perform better, by whatever means. These features make the Lisbon indicators also easier to be taken up by the political opposition or interested non-state actors although it has to be said that this usage seems to depend on how popular EU interference with domestic politics is to begin with. The Community Method is arguably less dependent on popular approval of the EU and therefore potentially more effective; but such inherent disregard for popularity (and populism) is not easy to justify by governments when politically salient issues of welfare state reform are at stake. For these two reasons it seems to me that, at the present stage of European integration, a soft method can be more effective in bringing about an ESM than the Community Method. It gives the EU a licence to shape policymaking in areas of redistributive social policy that the Community Method cannot, and it endows reform-minded government with a political rather than legal instrument that it can use opportunistically for stirring up its own bureaucracy. The crucial disclaimer is: ‘at the present stage of European integration’. Proponents of an ESM could easily argue that we therefore need more federal state-building, that neither of these integration methods is apt to bring it about. I will deal with the factual claim – an ESM is not conceivable as long as we do not have more of a European federation – in the next section. As regards the normative claim – there should be, the present stage is not good enough -- my response is ‘too bad then’ since the Lisbon Agenda is arguably the default option. Certain mechanisms of building a devolved state that we know from historical studies in comparative federalism are unlikely to come into operation in the foreseeable future, even if it were desirable.

8 This is not to blame the procedures or administrators; it is the very function of bureaucracies to deliver reliable, equitable and ‘disinterested’ decisions.

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One way of describing the development of welfare state under conditions of a federation is ‘top-down’ or ‘bottom-up’ (Obinger et al 2005). A top-down evolution characterised the cooperative or ‘marble cake’ federalism of Austria and Germany in which autocratic central governments could push for the introduction of social welfare programmes, roping in workers and employers to finance them rather than the states. The EU fits into this variant of federalism even if the Union is a confederation at best, in that legislative competencies and policy-making are inextricably intertwined. But a decisive difference is that Social Europe will be built around and in addition to fully developed welfare states at the sub-central level. This leaves only a bottom-up development that characterised the competitive or ‘layer cake’ variant of federalism in Canada or the U.S. A role for the federal government in (more generous or universal) welfare provision must then be attained against the opposition of lower tiers of government. Historically, three processes or strategies helped the federal level to overcome this opposition and it is clear that only one of them, regulation, operates in the EU (cf Obinger et al 2005: Table 1). 1. Fiscal transfers: the federal level may bribe the lower tiers into certain social policies

or take the co-financing as a pretext for shaping the policy. The budgetary means of the EU are so limited that this is not a feasible option.

2. Parafiscal bodies: the federal level can circumvent the lower tiers of government by establishing independent public bodies with their own budgets financed out of contributions. The Commission has no mandate and competency to establish such bodies that would sideline the member states, in particular no way to endow them with their own sources of revenue.

3. Regulation and privatisation: the federal level may outsource the provision of welfare services to the private sector and try to confine itself to regulating these private providers. This coalition-building of the centre against lower tiers of government is what the EU does to some extent, for instance if it promotes unrestricted freedom of services that puts competitive pressure on parafiscal arrangements or if it tries to convince member states to go for funded pension schemes.

In other words, it is only the latter, regulatory mechanism of federal welfare state building that is open to the EU. This brings us back to the Community Method. I have argued that this classical integration method has limitations. Thus, it is soft coordination that would have to get governments accept the idea that putting pressure or even undermining their parafiscal regimes has to be allowed or that making decisive moves towards a funded pension system is the only way to prevent a ‘pension crisis’. This is what the next section explores, ie whether the Lisbon Agenda has overcome the limitations of the Community Method in the realm of employment related reforms.

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4 Evidence for the emergence of a European social model9

One way of dealing with the methodological problem of identifying ‘Europeanisation’, here: of providing evidence for an independent influence of the Lisbon Agenda on domestic welfare state reforms, is to look whether reforms go against the momentum that another model would suggest. Thus, I will contrast ESM with other social models that underpinned institutional settings in the post-war era. To narrow this down, I choose the income maintenance model borne in the New Deal and the basic safety model first formulated in the Beveridge report. The income maintenance or New Deal consensus is only partially institutionalised in its homeland, the U.S., but characterises the overarching norm of many Continental European and Scandinavian welfare states: stability, both in a macroeconomic and in a socio-political sense. It is geared to ensure a stable family income through employment of one male breadwinner (Continental Europe) or one and a half breadwinners in terms of earnings (Scandinavia) as well as income transfers which safeguard living standards for some time. This stability guarantee is maintained by a relatively generous level of social entitlements, contingent on employment status or universal, as well as active macropolicies that were mindful of competitiveness. The generosity provides high incentives to seek paid employment for those able to seize the opportunity. But the high standards for profitable job creation thus created also exclude individuals with low skills (e.g. immigrants with language difficulties), low productivity (e.g. persons with disabilities) or time constraints (eg. care-givers, typically female). This pattern of gainful employment and social entitlements for what was once a clear majority but exclusion for some identifiable groups of the labour market contributed, somewhat perversely, to the sense of socio-economic stability that the New Deal model conveys: two thirds of citizens did not expect to become threatened by the vagaries of market forces. That arguably changed in the 1980s when the experience of unemployment, lasting exclusion from stable employment and the threat of impoverishment came to be an experience that was no longer confined to an ‘underclass’ or female carers. Another powerful model is what we might call the Beveridge consensus of ‘Insurance for All and Everything’ (Beveridge 1924). It is much less widespread than the income maintenance model, but the norm has prevailed while Beveridge’s specific institutionalisation has been abandoned. It is a powerful ‘Leitbild’ in any reform debate and provides for an interesting and subtle contrast with the Lisbon consensus. Its overarching norm is basic safety for residents; it is universal as regards eligibility and encompassing as regards scope (National Insurance covers old age, unemployment, accidents, sickness and maternity)10 and highly redistributive, in the original version only as regards delivery or provision, although not on the revenue side (financed out of a flat rate tax or lump-sum contribution by employees and employers). This model is 9 This section draws on and updates a paper on ‘Can there be a European social model?’ (forthcoming). 10 The Swedish welfare state follows the basic security model with respect to eligibility and scope, but is more generous in benefit levels.

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deliberately not generous, the services provided such as tax-financed health care are rather basic and both the means-tested income support for those not covered by National Insurance as well as the National Insurance benefits themselves are equally low if measured against an accepted poverty standard of 50 percent of median income. The lack of generosity and the need for aspiring middle-class families to buy services like child care or education in (semi-)private markets here works as an incentive to seek gainful employment, preferably for both breadwinners of a household. Instability of employment, however, remains a virtual experience of many, in particular since the basic safety model avoids to interfere with market income formation through employment protection. Having distinguished these models, it is also worth noting what makes them similar and comparable. First, the productivist Lisbon consensus shares with the other models that it establishes a link between social policy and the economy. What may be different is that the productivist consensus, in particular as expressed in the mid-term review of the Lisbon Agenda by the Barroso Commission (CEC 2005), tends to legitimise social policy by pointing out its ability to bolster market forces and less its ability to compensate deficiencies of markets as the other two models imply. Secondly, the normative emphasis on social policy as a productive factor, as income stabiliser or as basic security provider, respectively, does not mean that these social models completely neglect the other two imperatives. But the norms of productivity, stability and safety may not always be compatible or easily reconciled and so choices have to be made. This is key to interpreting the changes involved if a European social model were to emerge in the sense outlined above. For the empirical part we can therefore ask, which reforms would indicate that there is a new emphasis on employment and productivity, de-emphasizing or even jeopardizing income stability or basic security. If we can identify such choices, we may also be able to identify the moves which are indicative of a new consensus. The reforms that allow us to distinguish between the European and other two social models is how they relate to the labour market. In the productivist model, social policy tries to achieve inclusion through employment and therefore even subsidizes work that would otherwise not pay enough to make it worthwhile for the employed. In the income maintenance model, social policy tries to set standards for gainful employment through earnings related benefits or regulation and therefore influences deliberately the primary income distribution (before taxes and transfers). In the basic security model, social policy tries to interfere as little as possible with the primary income distribution as determined in labour markets, low benefits setting a uniform reservation wage only, and tops up income afterwards mainly on the basis of family rather than employment status. The Lisbon model thus distinguishes itself from the other two models in that it sees the labour market less as a resource for social policy but as an addressee for transfers.

• Certain tax reforms ‘to make work pay’ would bring about a European social model in contrast and tension with the stabilisation imperative of the income model: lower average income tax rates decrease the impact of automatic stabilisers because they simply have less weight in (taxable) household income. The same holds for lower marginal taxes, a decrease in progressivity makes the automatic stabilisers less responsive to fluctuations in the business cycle (Auerbach and Feenberg 2000: 14-17, Mabbett and Schelkle 2006: 7-8). These tax reforms are also, if for different reasons,

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at odds with the basic safety model insofar as that model favoured a flat rate tax to finance redistributive benefits. The Lisbon Agenda, by contrast, encourages differential tax relief for low-income households. This makes the tax system more selective and progressive at the lower end of the earnings spectrum, thus creating poverty traps that replace unemployment traps at the margin.

• Some deregulations of employment protection legislation (EPL) to ‘flexibilise labour markets’ may be at odds with the norms of income maintenance and basic universal safety, such as increasing the threshold of firm size at which EPL applies or allowing for an extension of unregulated casual work in contrast to well-defined fixed-term contracts. They will lower reservation wages and make earnings at the lower end of the income distribution more volatile, thus increasing the volatility of household spending and affect these workers disproportionately. To the extent that the deregulations are limited to firms hiring previously unemployed persons, they may be compatible with providing basic security. But it depends on the extent to which the crowding out effects on previously employed low wage earners undo the intended result of integrating disadvantaged groups into the labour market.

• Finally, old age security reforms that withdraw early retirement schemes are in line with the productivist consensus but at odds with the income maintenance model that prioritizes stability. This withdrawal replaces stable pension incomes for 55-64 years old by inherently more volatile earnings, possibly mixed with unemployment benefits. The same holds for privatisation or moves towards a funded system since that would make that part of pensioners’ income which depends on asset returns fluctuate with stock markets. The withdrawal of early retirement schemes is not necessarily at odds with the basic safety model; pension privatisation, however, would be if it reduces basic safety below the subsistence level of an average pensioner and thus jeopardizes old age security of low income households disproportionately.11

The following table lists the goals of the Lisbon reforms I will look at and how the three models would realise them in different ways.

11 The latter is certainly not the result of a deliberate design. But it is arguable that the UK pension system entails that risk for low income households who have, on top of their state pension, some stake in occupational schemes only – firms’ pension obligations are unlikely to be honoured in the aggregate according to repeated warnings by the pensions’ watchdog (Pension Commission 2004). There will be strong political pressures to bail out such pensioners and thus transform the notional funded system into an actual pay-as-you-go system.

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Table 3: Goals of the Lisbon Agenda in the three different models Lisbon Agenda European social

model (productive factor)

New Deal model (income maintenance)

Beveridge model (basic security)

‘Make work pay’ Short unemployment benefit duration; In-work benefits for target groups; Lower average and less progressive taxes

Employment-related benefits as a ‘carrot’; progressive tax structure

Low, short and targeted non-employment benefits as a ‘stick’; low flat rate taxes

‘Flexibilise labour markets’

Liberal Employment protection legislation (EPL); Temporary and fixed-term contracts, possibly tailored to target groups and firms; Shift to active labour market policies

Strict EPL or high replacement rate for unemployment benefits; Standardised contracts; Passive and active labour market policies necessary

Liberal EPL; Flexible standardised contracts; Active labour market policies not essential

‘Promote active aging’

No early retirement schemes; Promotion of privately funded sources of old age security

Early retirement schemes to maintain income and high value added jobs; Privately funded pensions only as top-up

No early retirement schemes; Basic state pension

I will look at four EU member states that the comparative literature on welfare states classifies as belonging to different regimes or worlds of welfare capitalism. This is not my interest here. My point of departure is that Germany represents the income maintenance model while the welfare state in the UK prioritises the basic security norm. Sweden is a hybrid, more generous as regards income maintenance than the basic safety model would suggest but sharing the universal thrust and a preference for light labour market regulation of that model. Greece is in flux, a country that has just started to build the welfare state pillar and to rely less on the family as the social safety net of first resort – it could thus be fertile ground for top-down welfare state-building by the EU. The empirical sketch tries to find out to what extent these countries have undertaken Lisbon-type reforms and whether these reforms can be interpreted as contributing to the emergence of a European social model rather than to an overhaul of their income

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maintenance or the basic security models. These reforms are covered, for the period of 1987-2002, by the Social Reforms Database that the FRDB maintains and updated by the labour market reform database of the European Commission for 2004. Unfortunately, there is no data on reforms in 2003. Table 4a: Germany Reform area Measures 1987-2004 ESM? Unemployment benefits

1994 UB reduced by 3% 1995 duration of payments limited 1997 rules on job refusal and eligibility criteria tightened 1999 eligibility criteria slackened for carers 2004 merger of UB and social assistance means cut in average level of UB; cut in duration of UB; tightening of means-testing; tightening of work requirement

Yes

Taxes and social insurance contributions (SICs)

1987, 1995, 2000 reduction of SICs 1991, 1994, 1996, 1997 increase of SICs 1997 admissible wage base to count subsidies lowered 1999 earnings allowance of up to 20% of UB 1999 obligation to pay SICs extended to casual employment and ‘apparently self-employed’

Not clear

EPL for all workers

1993 notice period for blue-collar workers extended to that of white-collar workers

No (Beveridge)

Measures for target groups

1997 more flexible employment contract in case of hiring longterm unemployed 1997, 2000 part-time employment of elderly and older workers subsidised and made possible, respectively 1999 access to job creation schemes facilitated; employer subsidies for new jobs of up to 5 ys; action programme to reduce youth unemployment through public offers 2001 active measures to fight unemployment of disabled persons 2002 Job Aqutive Act to increase employment and training 2004 new category of very low-paying jobs introduced for recipients of UB (new ALGII), refusal can lead to suspension of assistance

Yes

Early retirement schemes

1990,1991 ER made easier 1994, 1996, 1997 ER made more difficult, gradual withdrawal agreed in 1996 1999 reversed previous increase in ER age 2004 increase of minimum entry age from 60 to 63 years

Yes (overall, but uneven progress)

Private-public risk-sharing in old-age security

1997 phased decline in average replacement rate from 1999 onwards 2001 voluntary funded system to complement gradual reduction of replacement ratios for new retirees from 70% to 67-68% in 2030 2004 phasing in of taxes on all pensions and earnings

Yes (but not distinct from New Deal)

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Table 4b: Greece Reform area Measures 1987-2004 ESM? Unemployment benefits

1990 duration of UB raised from 7 to 12 months 1996 UB set at less generous flat rate

No (Beveridge)

Taxes and social insurance contributions

1998 small reduction of non-wage labour costs for youth hirings 2000 2% reduction of employers’ SICs for low-wage workers 2004 tax reductions for low income earners, divorced parents and those working in lagging regions

Yes

EPL for all workers

1990, 1991, 1998 liberalisation of collective agreements and arbitration of labour disputes 1998, 2000 promotion of part-time employment 2001 practice of temporary employment introduced 2004 overall duration of successive contracts in public sector must not exceed 24 months; facilitate conditions for renewal of fixed-term contracts in the private sector but also for converting fixed-term contracts into contracts of indefinite duration

No (Beveridge)


1997 active measures to fight unemployment of disabled persons 1998 employment subsidy programme for young and longterm unemployed 2004 provision of job placement incentives for UB recipients; incentives for employers to hire women, youth and elderly

Yes


1990 ER introduced for elder unemployed workers 1992 back-loaded pension formula to encourage later retirement

No (New Deal)


1996, 1997, 1999 new means-tested pension supplement; access facilitated and increased by about 50% 1997 new contributory scheme for agricultural sector 2002, 2004 general contribution rules for wage earners, extended to self-employed

No (Beveridge)

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Table 4c: Sweden Reform area Measures 1987-2004 ESM? Unemployment benefits

1993 UB replacement rate reduced from 90 to 80%; 5 day waiting period 1995 replacement rate reduced from 80 to 75%; 1995, 2001 tighter rules for refusal of job offers and active job-seeking 1997 Employment Bill: structure of UB changed, flat rate component in addition to earnings-related part; no more re-qualification for UB through subsidised jobs 2002 child care incentive to seek or extend employment

Yes


2004 tax reduction on labour income by lump-sum for rise in energy taxes

Yes

EPL for all workers

1992 government wage guarantee in case of firm’s bankruptcy lowered 1996, 1997 liberalisation and decentralisation of collective agreements 1997 length of notice periods determined on the basis of tenure rather than age 1997 twelve months fixed term contracts available without restrictions; after 3 ys to be turned into permanent contracts 2001 EU Directive facilitates part-time work



1986, 1987 training participation qualifies for UB; public job offer for unemployed close to benefit exhaustion 1994 training participation to qualify for UB abolished; youth practice labour market scheme phased out 2000 longterm unemployed required to participate in full-time activation measures 2001, 2004 adjustment insurance scheme for blue-collar older workers facing redundancy made more generous

Yes (except reform in 2004: New Deal)


1987 semi-retirement pensions increased from 50 to 65% of last income 1993 rules for ER tightened 1994 age limit for part-time retirement raised from 65 to 66, replacement rate lowered from 65 to 55% 1999 reduction of ER benefits by 6% 2000 new rules allow early retired return to work

Yes


1994 increase of tax on private pension schemes 1998 introduction of prefunded element; retirement age made flexible without upper age limit; guaranteed minimum pension for those with insufficient rights 1999 lower benefits and less favourable indexing of current old-age benefits 2001 size of pension payments more strongly linked to total life income than previously


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Table 4d: United Kingdom Reform area Measures 1987-2004 ESM? Unemployment benefits

1987, 1988, 1989 UB reduced by various measures (longer waiting periods, net rather than gross earnings) 1989 rules on job refusal made tighter 1996 UB replaced by Job-Seekers’ Allowance; duration halved from 12 to 6 months; replacement rate lowered; 100% marginal withdrawal in case of earnings

Yes


1999, 2001 significant increases in tax credits for low income families 2004 tax exemptions for provision of childcare contracted by employer

Yes

EPL for all workers

1998 national statutory minimum wage 1999, 2001 entitlement to unpaid three months parental leave; transposition of EU Directive; flexible working arrangements for parents with young children

Yes (but not distinct from other models)


1996 minimum income guarantee for disabled persons to move them into job 1997 job-search and training measures for lone parents 1998 Welfare to Work programme, covering longterm unemployed, disadvantaged and disabled persons, lone parents 2004 enhanced financial incentives for helping lone parents into work of at least 16 hours p.w.

Yes


n.a. n.a.


1987 employees allowed to contract out of State Earnings Related Pension by joining an individual pension scheme to which State Dept. pays minimum contribution 1989 employers allowed to set up ‘top-up’ pension schemes for their employees 1995, 1999 new private pension schemes 1999 minimum income guarantee for pensioners 2004 new retirement options providing greater flexibility to employers and employees; facilitate development of pan-European occupational pension schemes

Yes

Sources: FRDB Social Reforms Database (1987-2002) http://www.frdb.org/documentazione/scheda.php?id=55&doc_pk=9027 European Commission LABREF database (2004) http://europa.eu.int/comm/economy_finance/indicators/labref/ To highlight just the most relevant changes in the present context: in Germany, Sweden and the UK, there is a move away both from the income maintenance norm and from a focus on basic safety. This is relatively strong evidence for Lisbon-type reforms having been implemented. Reforms in Germany and Sweden have made their welfare systems more tailored to promote work than to maintain (in or out of work) income, Sweden has also abandoned some of the universal features of its entitlements. Britain has definitely not followed a basic security model in its reforms by making benefits less universal and interfering with the formation of market income such as a minimum wage.

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Greece, however, seems to opt for a universal, basic security model in tune with Beveridge. This casts doubt on the possibility that the Lisbon Agenda may be instrumental in a top-down building of an ESM-based welfare state where it is not yet well-developed. This is all the more surprising, given the persistent popularity of the EU in Greece if the Eurobarometer surveys are to be believed. This and the fact that both Sweden and the UK, not exactly the most enthusiastic EU members, seem to go with the flow of the Lisbon Strategy should make us sceptical about the direction of causation. Reforms are obviously compatible with the Lisbon Agenda but this does not mean that they are motivated by it.12 We may therefore doubt that Europeanisation in a causal sense is at work. But the Lisbon reforms that governments implement and softly coordinate still make for some convergence on the underlying norm of Social Europe, among welfare states we would not necessarily expect to converge.

5 The economic and political costs of a European social model13

Why do reforms in Greece not follow the Lisbon script (table 4b)? Or why do reforms generally or at best proceed at the speed of ‘two steps forward, one backward’ (table 2)? In this section, I will point out the economic and political costs that social policy as a productive factor has even though its laudable goals seem to combine only the best of all possible worlds, namely to bring about ‘the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion’. First, the institutional shift implied by the normative shift, prioritizing productivity and employment over income maintenance and basic security, has economic costs. The costs in terms of stability are that the effectiveness of tax-benefit systems to reduce volatility of household incomes may be weakened (Mabbett and Schelkle 2006). This is largely a consequence of the attempt to lower average and marginal taxes to increase work incentives. At least within the range relevant to most European fiscal systems, a larger size of government makes for more stabilising capacity, partly because it has a greater weight in household income and partly because it provides a larger sector of safe employment. Progressive taxes also make for more stabilising capacity as long as high marginal tax rates do not lead to endemic tax evasion; these higher marginal taxes make the automatic stabiliser of taxes more responsive to income fluctuations in the business cycle. There are also some a priori reasons to expect that Lisbon-type reforms raise the volatility of employment and income, that is these reforms give the automatic stabilisers more to stabilise. It has been a robust finding in empirical studies of liberalising employment protection that this increases the turnover, ie. some long-term

12 This is compatible with Claire Annesley’s (2003: 153) account of both a European and American influence on UK social policy, emphasizing that Europeanisation is a ‘two-way process of obligation’. In the particular UK case, it could even be that the European influence stems from a feedback loop in which the British support for the Lisbon Agenda then becomes an input to its own reforms. 13 This section, again, draws on the paper ‘Can there be a European social model?’ (forthcoming).

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unemployment becomes short-term unemployment without much impact on the overall level of employment (Young 2003). The economic costs in terms of less security can be grasped by ‘the risks of jobless growth’ (Directorate General 2005). GDP growth of between 1 and 3 percent is for most people a hardly fathomable statistical phenomenon, while an increase in actual or potential unemployment is a tangible, often traumatic experience that may even be subjectively perceived as more threatening than it is objectively. Ever since the on-set of the currency union in 2001, unemployment increased while employment also rose if slowly and less than GDP. While structural reforms and wage moderation seem to have paid off in terms of increasing employment, moderate GDP growth has been jobless afterwards, that is the “structural increase in the labour supply (mainly due to female) has taken place at a faster pace than the creation of additional jobs” (Directorate-General 2005: 10, 16). Greece, Germany and Sweden in particular, saw large increases in unemployment (Directorate-General 2005: 15). While it is early days to obtain hard evidence, it seems that the most likely explanation for this ‘joblessness’ of growth is a combination of more flexible work organisation and macroeconomic uncertainty (Directorate-General 2005: 55-56). In other words, firms responded to the moderate recovery in 2004 not as fast as in earlier recoveries by hiring permanent employees (in Germany and the UK) but employed temporary and part-time workers instead. And firms responded more strongly both cyclically and on trend to the last recession by reducing their workforce. So if these responses have been facilitated by Lisbon-type reforms, many workers must have found the last four years as providing considerable less job security and, if the risk materialised, less generous safety nets to take recourse to. A last economic cost results from the decline in universal coverage that the prioritising of tax credits and active labour market policies, generally the emphasis on better targeting of benefits, entails. All these measures can easily be stigmatising and would thus contribute to higher longterm unemployment. This is likely to become a more serious problem in low growth times and countries. Closely related to the obstacle of economic costs, both as regards stability of income maintenance and individual security, are the political costs. The Lisbon Agenda makes reforms a hostage to economic success. Especially in its most recent interpretation of the Mid-term review by the Commission (CEC 2005) or the Kok report that preceded it (Kok et al 2004), a benchmark was established that the success of social policy reforms is to be measured in terms of an increase in economic growth and a consequent reduction in unemployment. Yet, if growth is not conceivably picking up or the threat of unemployment stays present, this benchmark becomes a political liability. More generally, the reliance on output legitimacy is precarious, as Eriksen and Fossum (2004: 440-441) rightly point out, all the more so if the perceived success of policies depends on outcomes governments cannot fully control or generate. Moreover, the implementation of the productivist model has institutional consequences for political labour market arrangements. It uses labour markets much less as a financial and political resource for social policy, be it through revenues from employment or by

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making social partners to become stakeholders of the welfare state.14 This is of particular relevance for the income maintenance model. Countries like Germany that seem to move slowly but surely away from it will have to find alternative ways of financing social expenditures, for instance by taxes on consumption and pensions. Not only will this shift of tax bases away from earnings and SICs be contentious. The shift also weakens the nexus between costs and benefits of social security as perceived by workers and the direct link to labour costs that can be used for political exchanges in social pacts and collective wage agreements. Thus, the transition to the Lisbon model intends to target less generous benefits more tightly and is therefore prone to lose traditional political support from social partners in the process. It is not conceivable yet how the support from new stakeholders can become strong and institutionally embedded. The (incomplete) enumeration of these economic and political costs indicates just how challenging the Lisbon Agenda is for governments. They are not only asked to make their electorate put up with the loss of basic assurances; the same reforms may also make income and employment individually less stable and/or fiscal stabilisation less effective. This hardly gives the impression of effective government bolstered by the benign force of European integration.

6 Conclusions There is some evidence for the Lisbon Agenda bringing about a European Social Model in the sense that reforms are geared to realise the potential of social policy as a productive factor in the economy. The first piece of evidence is that EU membership has a positive effect on reform activism according to observers, such as the OECD, that are not overly sympathetic of EU welfare states. The thrust of these reforms is not clear-cut but they have the potential to lead to a considerable restructuring and transformation of European welfare states. However, it has to be said that the evidence on the reform record in Greece, Sweden and the UK casts some doubt on the causal link between the Lisbon Agenda and these reforms. The Lisbon Agenda may be more a rallying point than an immediate trigger for reforms. But even so, that reform measures in welfare states as different as Germany, Sweden and the UK rally around the same point is surprising. It becomes conceivable that they are not worlds apart, at least in a normative sense.

14 I am grateful to Deborah Mabbett (Birkbeck) for pointing this out to me.

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