Social Cohesion and the European Social Model Kees Vos, Paul de Beer and Erik de Gier*

The notion of a European social model emerged in the early 1990s, mainly generated by a comparison of the European and American welfare states. Now we wonder whether we can still speak of a model of this kind. Or do we need to take the increasing diversity in national systems into consideration? In this article we argue that a convergence towards a European social model has occurred. As a result though of the need to modernise social Europe, the trend towards greater diversity seems only appropriate. It could reinforce the development of a multi-speed European Union. Keywords: social cohesion, social model, enlargement, convergence, divergence

Introduction The articles in this special issue of the Tijdschrift voor Arbeidsvraagstukken (Journal of Labour Studies) address many of the challenges the European Union is now facing. The key questions raised here pertain to the sustainability of the welfare state, the future of industrial relations, and the level of labour participation and labour mobility in a knowledge society. How to achieve the objectives of the Lisbon agenda? How to pursue sustainable economic and employment growth while maintaining high levels of social cohesion and social protection ? What kind of European governance is most appropriate? Does the need for social cohesion necessitate the construction of one European social model? Since the Lisbon summit, some of us have taken the European social model for granted. In March 2002, the Barcelona European Council formally defined the European social model as based upon good economic performance, a high level of social protection and education and social dialogue (High Level Group 2004). Others vigorously deny the existence of a European social model and maintain that that

there is only the sum of perhaps widely divergent national social security arrangements. Unlike the economic cooperation embodied in an organisation like the EMU, the Member States resist the emergence of a European so cial entity and refer instead to the principle of subsidiarity. Which position is more realistic? Do we have to live with a patchwork of holy cows? Or are we inevitably marching towards a real European social model ? And if so, what is it going to look like?

The EU vs. the US: the welfare state revisited At the start of the 1990s, welfare state sustainability was under heavy pressure in the US and Europe alike. In both cases, growing public expenditures forced the state to find a new balance between public and private responsibilities. In the US the conservative revolution reduced the role of the federal government, especially via budget cuts on social expenditures. In Europe obligations to meet the EMU criteria necessitated social expenditure reductions. In either case, it led to system reforms based in

* Dr. C.J. Vos and Prof. P.T. de Beer are members of the editorial board of this journal, and Prof. H.G. de Gier is guest editor for this special issue.

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many ways on similar diagnoses and comparable therapies. In Europe as well as the US, analysts noted the down sides of the social protection system such as poverty or social security traps that could only be remedied by more flexible labour markets, more activating social security schemes, and more tailor-made ap proaches by decentralising social policy implementation. It was in this same period that the European social model was mentioned for the first time. In the 1990s Europe was witnessing widespread unemployment and the US strong job growth. Social scientists explained the situation by focusing on the fundamental differences between the social security arrangements in Europe and the US. The main difference was not the level of social protection expenditure as such but the balance between public and private responsibilities: the accep tance of social inequality in the US versus solidarity in Europe, where maintaining or pro moting social cohesion was considered a public or government responsibility. This implied the notion of a European social model, since the various national systems in Europe ap peared to be based on common values of social solidarity and public responsibility to protect the weak. The notion of social policy as a pro ductive factor was born of this unity in diversity, which means that an activating welfare state can enhance economic prosperity (e.g. Larsson,1996).

Social cohesion Fostering social cohesion and solidarity has been a European ambition ever since theTreaty of Rome, and not only among the Member States (Article 2), but in later years among the regions as well (Article 130A). More recently the European Council of Lisbon has formulated the European ambition `to become the most competitive and dynamic knowledgebased economy, capable of sustained economic growth with more and better jobs and greater social cohesion'. The social agenda of Nice has implemented this ambition by underlining the need to modernise and improve the European social model. The agenda not only includes strengthening the role of social policy as a competitive factor, it includes preventing pov-

erty and exclusion and promoting the integration and participation of all the citizens in eco nomic and social life. Reducing social inequality and poverty, raising employment rates and reducing unemployment rates are considered crucial. Key objectives include the integration of people excluded from the labour market and more and better job opportunities for vulnerable groups, for example via measures to correct regional imbalances in Europe and in the Member States. As is noted by the Commission (2000),`Unemployment is the single most important reason for poverty. Nearly two out of three of those unemployed are at the risk of poverty. This is why a job is the best safeguard against social exclusion. However, employment alone does not solve all problems. [. . .] It is important to focus attention on those at the margins of the labour market, by investing in people to increase their employability and by reducing barriers for labour market entry. Confronting these challenges requires multi-faceted policies that go beyond labour market issues and aim to increase social inclusion and participation.' Hence, public responsibility for social cohesion inside as well as among EU Member States is a common challenge and a fundamental value of the European social model.

Unity in diversity Policy changes in Europe in the sense of greater flexibilisation and decentralisation coincide with similar changes in the US. At the same time a somewhat different movement is emerging at the EU level in the efforts towards greater social policy coordination. Structural funds have been set up to improve the situation in declining regions. As to quality of work, harmonising directives have resulted in a common level of protection. By taking measures to improve equal treatment, national approaches to social inequality have been harmonised. National policies have also converged in other areas. The economic growth in the 1990s enabled several Member States to raise their so cial security expenditures and led to a reduction in the social protection expenditure variance (see Goudswaard and Van Riel in this issue). Income levels have also converged in the Member States. Since they joined the EU, the Tijdschrift voor Arbeidsvraagstukken 2004-20, nr 3 337

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GDP per capita in Portugal and Spain rose to 70 % and 80% respectively of the European average, and the income level in Ireland rose from 60 to 120 %. Only in Greece, with a pro longed period of recession, has the level not risen since the time of entry and is it still only 70 % of the EU average (Morley 2003). The EMU stimulated the convergence of wage increases inside as well as outside the euro zone. Purchasing power increases still varied from 2.5 to 7.1% in the 1960s, but fell to between 0.2 and 2.1% a year in the 1990s (EIRO 2000). In addition, the Member States are implementing EU coordinated programmes to boost employment, increase labour participation and pro mote pension system sustainability. Moreover, many EU efforts were and still are being made to strengthen social dialogue at the central European and sectoral levels. These developments are the result of two simultaneous policy processes: one of closed co ordination focused on common policy measures and one of open coordination focused on common policy goals. Conditions on the open market are a good example of closed coordination. They have to do with directives on peo ple's free movement and free competition as well as obligations linked to binding agreements, e.g. on the equal treatment of men and women and the EMU. In this field we can speak of spill- over effects of European policy. The second process has to do with the commonly accepted values stipulated in the European Convention for the Protection of Human Rights and Fundamental Freedoms. The processes both force the Member States to adapt their own systems, thus stimulating convergence. This in turn gradually results in a European social model based on common values and implemented by similar forms of governance. The result can be described in terms of a `multi-level system of regulated autonomy' or a `multi-tiered EU social and employment community' (Chouraqui and Kelly 2001, Esp ing-Andersen et al. 2001).

Diversity in unity Almost simultaneously with the start of the debate on a European social model, Esping-Andersen contributed to the discussion on social system diversity with The Three Worlds of Wel-

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fare Capitalism, which was published in 1990. In his book he draws a distinction that has since become classical between three types of welfare states: the Scandinavian or social democrat model, the Continental or corporatist model and the Anglo -Saxon or liberal one. The three types are characterised by the extent to which they combine essential socio -economic objectives such as a high labour participation rate, a large degree of social equality and a moderate level of public expenditure (EspingAndersen 1990). However, there is an `incompatibility triangle' here, since it is almost impossible to achieve all three objectives of social equality, high labour participation, and budget moderation simultaneously (Iversen and Wren 1998). The liberal states fail to achieve a low poverty rate, the social democrat welfare states have a heavy tax burden and the corporatist ones have low employment rates. This incompatibility poses a challenge to the European social model, since it means European countries have to choose between sacrificing social equality, high labour participation or budget moderation. Esping-Andersen's classification stresses the historical diversity of the European systems, which might even be increased by decentralisation and flexibilisation processes and EU enlargement (Biagi 2001). From this angle, it is illusory to speak of one European model. Nor would it be advisable, since it would only stand in the way of adequate reactions to increased international competition on a liberalised European market. To respond flexibly to the consequences of regional or sectoral eco nomic shocks, diversity in working conditions and protection arrangements is called for (Den Butter and Hazeu 2002). A European model in the sense of harmonised systems or common minimum standards is unnecessary, since there are sufficient policy options for the separate Member States to safeguard social cohesion via their own systems (Begg et al.1993). Arguably, this point of view bears a similarity to the idea of a multi-speed Europe to be constructed and institutionalised along the typology mentioned above. Perhaps a fourth type of welfare state should be added, since it is likely that the new Member States will grant priority to economic growth over social pro gress.

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Common challenges Despite their diversity, all the Member States are facing comparable challenges. They all face problems like emerging social polarisation due to the transformation of the world of work combined with issues of social protection sustainability, traditional family structure fragmentation and the pressures of demographic changes. The emergence of what Robert Reich calls `electronic capitalism' is changing the nature of the economy. The traditional notion of the company as a community of capital and labour is no longer as valid as it once was. Growing numbers of corporations focus on increasing their shareholders' returns. Workers are facing the demands of a new economy, and the nature of their work is changing. In the new world of work, highly trained and flexible workers are needed who can constantly acquire new knowledge and skills. But in the new as well as the old Member States, numerous workers are still trapped in the old economy in traditional but shrinking mass production industries with skills and training that are very rapidly becoming obsolete. The result is a widening gap in the working population. As Robert Reich (1996) notes, `This is a problem for all of us, not just the bottom half of the workforce. Almost three quarters of our national output comes from people; only one quarter from machinery. The quality of our labor force is the engine of economic growth.' As Naumanen demonstrates in his article, not only does the knowledge economy have different implications for various groups in the labour market, there are sizeable differences between countries. Depending on whether the focus is on how people gather information via education and R&D, how they use knowledge in the production process or how they reshape entrepreneurship and the business environment, various countries are leading the way or lagging behind in Europe. The differences will also influence the economic and social performance of EU countries in the decade to come. Labour market marginalisation processes have a wider impact simply because vulnerable workers are also vulnerable citizens and usually represent vulnerable families. There might be a threat of polarisation in society due to growing social inequality. According to OECD calculations (2002), inequality and poverty

have increased substantially in recent decades in most EU Member States. As is noted in a report presented during the Belgian EU presidency,`It will be far more difficult to construct a competitive, highly productive economy and a sustainable welfare state if, say, a third or a fourth of the population is condemned to marginality' (Esping-Andersen et al. 2001). A completely new set of challenges pertains to combining paid work and domestic responsibilities such as child care and a more even distribution of working hours and income over the life course, thus improving the work-life balance (Breedveld and Groot in this issue). This challenge can be tackled by introducing life- course policies supplementing or perhaps even partly replacing the existing social security arrangements. Ultimately, this may result in a fundamental reform of social security if, as Breedveld and Groot suggest, the life- course arrangements are primarily based on individual savings instead of the now dominant payas-you-go financing. Alternatively, both kinds of financing can be combined in a three-pillar or three-tier scheme, with the first tier consisting of a flat rate benefit financed on a pay-asyou-go basis, supplemented by a second-tier benefit financed from collective saving schemes and topped-up by the third tier of individual savings. In the light of these common challenges, it is not surprising that EU Member States formulate similar social policy objectives and adopt comparable solutions and practices. In many respects, the way forward will simply have to be shaped by European cooperation, which almost automatically leads to the question of whether the challenges cannot be met as well or perhaps even better at a transnational level. This question will become even more urgent once the consequences of the enlargement have been taken into account. Under the present economic and employment conditions, the old as well as the new Member States have no choice but to comply with the EMU criteria, which enhance the need for budget control and make the sustainability of adequate social protection even more problematic. Increasing labour participation is considered the main policy option for solving these pro blems. In times of stagnating economic growth, activating social security and greater labour market flexibility will be the instruTijdschrift voor Arbeidsvraagstukken 2004-20, nr 3 339

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ments to achieve this aim. Via the method of open coordination, common guidelines and objectives have already been adopted in this and related areas of social policy. In short, all the Member States focus their social and economic policy on the two aims, budget control and increasing labour participation. With the exception of Denmark, Finland and Sweden, this appears to coincide with increasing income inequality and growing poverty rates. One might speak in this respect of a convergence of social systems, be it that the joint optimalisation of the two objectives is hardly compatible with the fundamental value of social cohesion. This question of incompatibility could be even more urgent once the EU enlargement is taken into account.

Enlargement Though the previous enlargements did not occur such a long time ago, the EU has recently witnessed quite a substantial new one. Needless to say, in the previous waves of enlargement the acceding countries adapted quickly to the European process of convergence. The newest Member States did impressively well in their pre-accession stage. However, there are still several important differences.Without giving a complete picture, we would like to mention a few indicators that could be relevant to the degree of social cohesion in the near future. Firstly, the new Member States have achieved a steady albeit not always homogeneous pattern of economic growth in the past decade. Despite marked differences among them, their various growth rates exceeded the European average, especially in the second half of the 1990s.Trade with EU Member States also increased significantly in the 1990s. More than half and in some case two -thirds of the foreign trade of almost all the new Member States is now with the EU. Foreign direct investment (FDI) accounts for a high percentage of GDP, in some cases comparable to the extremely high FDI figures of Ireland and the Netherlands (Kohl and Platzer 2003). From an eco nomic perspective, this might indicate that the new Member States are already fully integrated into the EU. But despite their striking economic transformation, there are still substantial in-

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come disparities compared to the old EU Member States. In this respect Slovenia is a frontrunner with a GDP per capita of 72% of the EU average in 2000, followed by the Czech Republic with 60 % and Hungary with 53%. But in general, the income gap hardly seems to have decreased in recent years. Moreover, economic growth has not resulted in substantially lower unemployment levels. In many countries they still exceed the EU average, again with the exception of Slovenia and Hungary, with a 5.7% unemployment rate, and the Czech Republic with 8% in 2001 (Vos, 2004). As to the quality of work, in this issue Smulders shows that the dividing line in Europe does not run as much between the old and the new Member States as between the northern and western countries on the one hand and the southern and eastern ones on the other. Although the variety within the EU certainly increases with the accession of the new Member States, this does not mean the new states constitute a homogeneous block. There do seem to be more systematic differences as regards the law and the practice of industrial relations between the new and the old Member States, as Weiss notes. It is not clear yet whether the less developed industrial relations in the new states will put pressure on the relations in the old ones or whether the new states will soon imitate the patterns of the old ones. It is nonetheless unlikely that the new Member States will play a substantial role in the further development of the social dialogue at the European level for quite some time. In short, taking the structural differences between the new Member States and the EU-15 into account, the question of social cohesion in Europe looms even larger.

Challenged cohesion Will common challenges ultimately result in common policies? Or should we continue to work on the assumption that a joint approach is only justified if the Member States cannot achieve their urgent goals independently? The Belgian report mentioned above describes the dilemma as follows. `Does an effective policy for social inclusion call for common European objectives? Would we all be better placed by a strategy of coordination at EU level? Or, why

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not simply continue to delegate such to the discretion of national policies?' (Esping-Andersen et al. 2001). There does not appear to be much to be learned from the experience of federal states like the US, Canada or Australia in this respect, as the article by Versantvoort, Peters and Vossen shows. Since the history and federal structure of these countries differ so much from the European Union, no straightforward conclusions can be drawn about policy coordination there that would be relevant to how EU policy should be coordinated. The EU seems to be a union of countries sui generis that will have to find its own solution to the problem of policy coordination. Many European documents suggest that a spontaneous convergence will occur. The Treaty of Rome assumes that the common market as such will foster harmonisation of the social systems (Article 117). Closer European integration and increasing factor mobility are expected to result in a common social policy. As a result of the single market, we see free mobility of goods, services and capital, especially taking into account that 90 % of the total European trade takes place within the Union. The mobility of labour is however decreasing rather than increasing.With only 1.5% of the Europeans living abroad in the EU, a single European labour market still seems very far away. Under these circumstances, social spillovers are limited and there seems to be no reason to harmonise social systems or adopt common social minimum standards. Member States do not have any limitations when they follow their own national preferences in terms of income redistribution (Begg et al. 1993). The question remains however as to whether the far greater differences between the new and old Member States will stimulate migration. Krieger and Ma|ª tre note in their article that they only expect moderate numbers of migrants to move from the new to the old Member States. But even limited numbers of emigrants might support the economic catchingup of the acceding countries and at the same time tax the sustainability of the welfare provisions in the old Member States (Sinn and Ochel 2003). However, if labour mobility remains insignificant, labour cost differentiation would virtually be the only possible response to differences in productivity and regional or

sectoral economic shocks (Den Butter and Hazeu 2002). This line of reasoning bears a similarity to the prisoners'dilemma: as long as labour mobility remains marginal, there is no reason to co ordinate labour costs and income redistribution arrangements, but in practice, in addition to cultural barriers, it is precisely these factors that create obstacles to labour mobility. This type of dilemma can become even more pressing if regional specialisation increases as a result of the open single market. As a result, eco nomic shocks will be even more region specific. This is what is happening in the US on a larger scale and is mainly resulting there in workers' migration. In today's EU, the only possible alternative is the relative adjustment of wages between regions. From this perspective, greater coordination at the European level would be counterproductive since it could only result in less regional or national flexibility (Hartog and Teulings 1999). Other authors allude to the risk of competitive wage moderation, which could be disadvantageous for all the countries involved (Den Butter and Hazeu 2002). Moreover, relative wage adjustment can mainly be expected to occur in regions already in a highly unfavourable position due to their economic structure. These regions run the risk of social and regio nal marginalisation. Trends in this direction that are apparently emerging in the new as well as the old Member States could be a severe threat to social cohesion in Europe.

Reconciling diversity If social cohesion is endangered by these developments, the issue of the possible emergence of a European social model will have to be addressed again. Will it still be possible in the future to meet the challenges with a patchwork of purely national social protection arrangements? Are we wise to wait for the spillover effects of cross-border consumption, mo bility and free competition to result in a spontaneous policy convergence without intentional policies? Or should we anticipate a UStype redistribution from public to private responsibilities? Since it is society itself that ultimately demands protection against the dysfunctional efTijdschrift voor Arbeidsvraagstukken 2004-20, nr 3 341

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fects of social exclusion, the European social model is based on the principle of common responsibility. This is why social risks should be prevented by collective arrangements (Berghman et al. 1998). The more transnationally so cial risks manifest themselves, the more reason there will be to adopt a transnational ap proach. In the opinion of Vandenbroucke (2001), European integration has reached the point where the abstract notion of a social Europe should be made more concrete. For the time being, he sees the open method of coordination as the only viable way to achieve this aim. In the course of time though, the objective will have to be to give the European social model its final shape. In a multi-speed Europe, its final shape can only be a continuation of diversity by the institutionalisation of three or four more or less competing social models. We can thus conclude that social cohesion in an enlarged European Union is a challenge for the separate Member States and even more so for the community as a whole. If there is a growing consensus on social policy objectives and joint policy learning results in policy convergence and the adoption of similar policy instruments, there is all the more reason to reconcile diversity by agreeing on the contents of the European social model. A model that not only consists of common fundamental values and common levels of protection, but also includes common policy intentions to increase the participation rate combined with joint efforts towards budget control, which is especially important for the sustainability of the social systems. Lastly, there is the question of what the future significance of social cohesion will be as a core normative underpinning of a European social model. To what extent are the objectives of a high participation rate and moderate public expenditure indeed incompatible with so cial equality and cohesion ? To what extent will it be possible to find a sustainable balance between security and flexibility? Between the fundamental value of social cohesion and the objective of social activation ? Between equity and jobs? As was recently noted (High Level Group 2004), `The social inclusion process is sufficiently flexible to allow countries to choose different instruments to achieve the commonly agreed objectives.' This means a multi-speed European Union will provide op -

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portunities to explore various approaches to welfare state reform, including the Americanstyle transfer from public to private responsibilities. European normative and institutional traditions should however reconcile cohesion and sustainability. Only if the welfare states' self-transformation succeeds in establishing a new and commonly accepted balance will we be able to speak of a real European social model in the future.

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