Is globalisation a threat to Europe's social model(s)?

4 March 2008

George Alogoskoufis, Greek Minister of Economy and Finance, said globalisation had far-reaching implications for Europe’s economies and societies. Some claim that it directly benefits poor countries and low-income groups most, while industrialised societies benefit indirectly because it forces them to modernise their institutions and abandon old-fashioned social and economic models. Others assert that globalisation has the opposite effect, disadvantaging poor countries and low-skilled workers in rich countries, eventually leading to social unrest.

So has globalisation made a positive contribution to European economic growth over the last 20 years? The Minister believed it had, given that EU growth rose from 2% in 1989-1998 to 2.5% in 1999-2008, while in the US it fell from 3% to 2.6% and in Japan from 2% to 1.5%.

However, even in Europe, globalisation is “not a tide that raises all boats at the same time”, he said, as national factors have a significant effect. For example, Germany’s GDP has fallen in the last decade following its re-unification, while GDP rose sharply in the UK and Ireland, which have gone through major economic restructuring.

Overall, globalisation, coupled with monetary and economic integration, have spurred on European economic growth, although being in the euro zone has not had a marked effect - some countries benefited from joining, while others benefited from staying out.

Globalisation and inequality in Europe

Figures show that in an increasingly globalised world, average incomes are rising faster in emerging and developing countries than in advanced economies, said Mr Alogoskoufis. At the same time, inequality within both emerging and developed economies has grown, as higher-skilled employees benefit most from technological changes, thus increasing their earning power.

The employment rate in the EU-27 increased from 60.7% in 1997 to 64.5% in 2006, and the employment rate of older workers increased from 36.2% to 43.5%. However, EU unemployment was still higher than in the US or Japan.

While the level of those at risk of falling into poverty before welfare benefits in the EU-27 rose by 2% to 26% between 1997 and 2006, welfare benefits reduced those at risk to 16% in 2006, although the picture differs from country to country – in Scandinavian countries, they reduce those at risk from 29% to 12.5%, with lower reductions in the Mediterranean countries of Italy, Spain and Portugal.

There is no single ‘European Social Model’, said Mr Alogoskoufis; instead, Europe has developed in four distinct ways:

  • Nordic - based on social welfare, social protection and high taxes;
  • Anglo-Saxon - limited collective provision and flexible labour markets;
  • Continental - social assistance through public insurance schemes and high social protection;
  • Mediterranean - high legal employment protection with lower levels of unemployment benefits.

Despite their differences, these approaches share some common features: government intervention to reduce poverty and social exclusion, a fairer income distribution, social insurance and the promotion of equality of opportunity. This rests on three basic pillars: pensions, health and long-term social protection for the poor/disabled, and redistributive taxation.

The sustainability of the European Social Model depends on two key factors, said the Minister: firstly, whether it can be reconciled with sufficient (non-financial) incentives to help reduce unemployment in the face of competition from emerging countries; secondly, whether social security systems can remain sustainable in the face of an ageing population.

Reforming the European Social Model  

Bold reforms are needed to ensure the European Social Model is sustainable, said Mr Alogoskoufis, and the Lisbon Process - with its emphasis on growth, employment and competitiveness - is the key to implementing these. The success of the Lisbon Process is that it is a coordinated but decentralised process: it relies on national reform programmes that are monitored and assessed by the European Commission and the European Council.

Any reform of the European Social Model cannot take a ‘one-size-fits all’ approach, but must reflect the diversity of EU Member States - for example, the Nordic model, with its high levels of taxation and flexicurity, would not be acceptable to those embracing the Anglo-Saxon model of greater labour market flexibility. Reform must embrace all these elements, with better funding for the welfare state coupled with social security reform, more flexible labour markets, and greater emphasis on education, training, research and development.

Turning to the Greek experience, Mr Alogoskoufis said the government had been following an ambitious reform strategy based on fiscal consolidation and structural reform, and tax reform and liberalisation of the economy had ensured “robust” growth and employment. The government is now embarking on a second phase which includes reforming social security, improving the efficiency of welfare benefits, integrating digital technologies, improving education and training, reducing tax evasion, and increasing the transparency and effectiveness of public expenditure.

He said he was confident that all EU countries would find ways to improve the functioning of the European Social Model to make it more sustainable. Globalisation is not a threat, but a challenge and an opportunity.