The economic crisis of recent years continues to have a profound effect on the lives of European citizens. Economically, politically and socially, it has led to fundamental change in many people's lives. In addition to creating new concerns, the crisis has simultaneously exacerbated existing ones, raising profound challenges to the sustainability and success of the European model. This book seeks to examine this new 'social reality' of post-crisis Europe. The authors conclude by exploring what both the EU and national governments can do to restore Europe's strength, sustainability, cohesion and competitiveness in a climate of rising populism.
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About the Author
Patrick Diamond is a Senior Research Fellow at Policy Network, Gwilym Gibbon Fellow at Nuffield College, Oxford, and a Visiting Fellow in the Department of Politics at the University of Oxford.
Roger Liddle is a Labour member of the House of Lords in the United Kingdom and Chair of Policy Network.
Daniel Sage is a lecturer in Sociology and Social Policy at the University of the West of Scotland, postdoctoral researcher at the University of Stirling, and research associate at Policy Network.
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The Social Reality of Europe After the Crisis
Trends, Challenges and Responses
By Patrick Diamond, Roger Liddle, Daniel Sage
Rowman & Littlefield International, Ltd.Copyright © 2015 Policy Network
All rights reserved.
ECONOMIES AND LABOUR MARKETS
Although the most serious risks of the economic crisis such as a complete breakdown of the eurozone have seemingly now been averted (although at the time of writing, a Greek exit remains distinctly plausible), many European states nevertheless continue to endure anaemic economic growth and seemingly chronic structural weaknesses. In November 2014, the European commission significantly downgraded its forecasts for growth in the eurozone. In its February 2015 forecast, the commission pointed to 'new developments ... that are expected to brighten in the near term the EU's economic outlook that would have otherwise deteriorated'. Predicted growth for the eurozone is now expected to rise from a sluggish 0.8 per cent in 2014 to 1.3 per cent in 2015 and 1.9 per cent in 2016. Crucially, Germany – the economic engine of the eurozone – has predicted growth of 1.5 per cent in 2015 and two per cent in 2016. This modest trend towards the return of to growth is put down to the decline in oil prices, the depreciation of the euro, the European Central Bank's (ECB) embrace of a large-scale quantitative easing programme, and the commission's own InvestEU investment plan. However, even on this more optimistic outlook, the commission still expects unemployment in the eurozone to average 10.6 per cent in 2016 and 9.3 per cent in the EU as a whole: this is considerably above the pre-crisis levels of 7.5 per cent and 7.2 per cent respectively.
Even in Germany, which has been the EU's greatest success story in terms of employment growth, the modest prospects of growth feed fears of a 'German illusion', the phrase coined by the economist Marcel Fratzscher to describe Germany's apparent economic weaknesses and underlying vulnerabilities. In short, Fratzscher argues that Germany's economic strength has been embellished by factors such as its labour market performance, with deep weaknesses in other areas of the economy, such as a comparatively low rate of domestic investment and a rapidly ageing population. On the other hand, Germany is increasingly at the centre of a cluster of countries such as Austria, the Czech Republic, Poland, Slovakia and Romania that excel in manufacturing and are where Europe's industrial jobs are increasingly located. This shift in the pattern of manufacturing and supply chains has been a factor in the challenges of declining competitiveness and social sustainability that southern Europe faces.
The overall figures for the EU and the eurozone conceal vast differences in predicted economic performance. For instance, after years of sluggish growth and a 'double-dip' recession, Ireland and the UK are predicted to enjoy robust growth in 2016: 4.6 per cent in Ireland and 2.7 per cent in the UK. Nevertheless, claims of a resurgence of success in the UK in particular should be treated cautiously.
Despite the gradual re-emergence of UK growth over the last 18 months (in part a bounce-back against the calamitous drop in output immediately after the financial crisis), and the strong growth in employment, a long-term view of economic performance indicates a deeper trend of relative UK decline compared to the major economies of continental Europe. In the years before the crisis among the four big EU economies – the UK economy had caught up with France and Germany, which had previously enjoyed the highest GDP per person levels in purchasing power standard (PPS).
By 2005, the UK had a GDP per person PPS of 27,800: higher than Germany (26,000), France (24,700) and Italy (22,400). By 2013, however, the UK stood at 27,200. This was some way behind that of Germany (32,000) and even France (27,800), a trend that might seem surprising given the portrayal of the French economy as a 'basket case' by sections of the UK political and media establishment.
That the economic crisis has driven new trends in GDP growth in Europe is evident in the experiences of other countries in the EU. As Figure 2.3 indicates, the three northern European countries of Denmark, the Netherlands and Sweden enjoyed steadily rising GDP per person PPS growth between 2005 and 2013. Equally in eastern-central Europe, the Czech Republic and Poland have continued to thrive economically. In particular, Polish growth has been remarkable: from a GDP per person PPS of 11,500 to 17,500 in eight years. This is part of the Polish 'economic miracle'; in 2009, when the EU was in the darkest nadir of the crisis, Poland was the only EU economy that continued to experience economic growth. The EU's 'convergence machine' is still alive and well to Germany's east.
As such, Poland's real GDP is now almost 20 per cent higher than in 2008, while the rest of the EU is only recently making up its losses from when the financial crisis first broke. Where those losses have been most severe is also shown in Figure 2.3: Greece, where GDP per person was lower in 2012 compared to 2005, and Spain, where by 2013 there was a rise of just 1,600 (and a loss of 1,700 since 2007, the high point of Spanish GDP). The scale of this divergence is illustrated in Figure 2.4, which shows the average GDP per person change between 2005 and 2013 across the EU's seven distinct regions. Average change has been greatest in the Baltic region (6,000) but with relatively strong growth of over 4,000 PPS in the continental, Nordic, east-central and south -eastern regions. In contrast, the southern member states have collectively experienced a rise in GDP per person of only 1,633 since the crisis. The UK and Ireland fared the worst, however, with an overall joint contraction of 150, underlining their unusual degree of exposure to the financial services sector.
This picture is seemingly at odds with the economic progress apparently enjoyed by the UK in the past two years. However, while the UK has recently experienced some of the strongest economic growth in the EU, with 2.6 per cent growth in the last year and a buoyant labour market, its poor performance on living standards reflects the unique experience of the UK during the crisis. This includes a significantly sharper fall in GDP during 2008–09 compared to other countries, an over-dependence on financial services, the depreciation of sterling against the euro, and the apparent transition of the UK from a pre-crisis economy of high employment and high wages to a post-crisis economy of high employment and low wages, reflecting weak productivity growth and, throughout periods, strong net migration expanding the workforce. As the ONS observes, before 2008 the UK had the highest growth in wages in the G7; in the post-crisis world, however, the UK now has the lowest wages among the industrialised countries. Living standards have begun to improve in recent months as nominal wages outstrip the unusually low inflation rate, but the disparity in the UK's economic performance – between high growth and stagnant living standards – is an important feature of political debate in the UK which shows little sign of abating. In February 2015, for example, the Institute for Fiscal Studies confirmed that the incomes of working-age people in the UK were yet to rise above pre-crisis levels in 2007–08. The over-65s have done better.
Another dimension of the post-crisis economy in Europe is the exacerbation of regional inequalities. Europe now has an arc of wealth growing through the centre of the continent to Scandinavia and south-east England and touching north-east Spain and northern Italy. Regional differences within many states are pronounced, however, most notably in Italy, Spain and the UK. In 2011, regional GDP per person (PPS) in Britain ranged from 80,400 in Inner London to 16,100 in West Wales and the Valleys. Furthermore, the gap between the two regions has grown since the start of the last decade. Other deprived regions in the UK have similarly experienced a decline in GDP since before the crisis, most notably Cornwall, Northern Ireland and the Tees Valley.
In short, the distribution of economic growth in Europe looks startlingly different in 2013 compared to 2005. Some regions, such as the northern and central-eastern countries, are considerably richer per inhabitant. Others, most notably the south of Europe and the English-speaking countries, have fared much worse. Many of these poor performers have deep-seated weaknesses in intermediate skills. Ireland, Spain and the UK have had to cope with the after-effects of property booms that collapsed. Underlying this shift are deep structural trends that pre-existed the financial crisis, not least the growing disconnection between the southern member states and manufacturing production chains in the industrial heartlands of Europe, as the accession countries in the east provide more accessible, low-cost labour.
Europe has always been a union comprised of economic unequals, but the section above indicates a sharpening of these inequalities over time, especially between the robust performance of the northern continental states and the experience of the poorer member states along the Mediterranean. Although the wider ambition of European convergence still seems a credible goal for the rapidly expanding eastern European countries, the prospect of those in the south – which, with their rapid economic and income growth in the 1990s and 2000s, appeared to represent the realisation of European convergence – have now declined.
Alongside GDP, changes in incomes further underline the new social reality of post-crisis Europe. Table 2.5 shows evidence of the great stagnation in British living standards, with median net equivalised incomes (PPS) falling from 16,894 in 2005 to 16,469 in 2013. Such figures give credence to the centre-left critique in the UK: that despite robust economic and employment growth in recent years, living standards have remained stagnant for almost a decade and that this is not a recovery that is significantly touching the lives of ordinary citizens. This is in stark contrast to the continued increase in median incomes in both France and Germany, while even Italy has experienced some income growth, albeit at a significantly slower rate. The impact of the crisis has seen the UK lose its position as the most prosperous of the major economies: UK living standards are now more on par with Italy than either France or Germany.
Yet the starkest divergence in living standards is between the north and south of Europe. Taking a sample of 11 northern and southern countries, Figure 2.6 shows growth in median incomes between 2005 and 2013. In 2005, the difference between the poorest and richest states – Austria and Portugal, respectively – was 8,958 (PPS). In 2013, Austria and Greece now represented the two end poles of prosperity in the north and south, yet the difference in incomes between the poles has expanded to 11,838: an increase of 32 per cent. On incomes as with GDP, the EU is far from converging: rather, structural divergence characterises the economic trajectory of post-crisis Europe.
The greatest structural divergence in Europe today is not in GDP growth or incomes, however, but in employment opportunities and labour markets. The Europe 2020 strategy, announced in 2010 as a successor to the Lisbon agenda, has a headline target of getting 75 per cent of 20–64 year-olds into work across the EU. This is an ambitious objective, but progress towards the goal up to 2008 was positive, when an average employment rate across member states of almost 71 per cent was reached. A large element of this improvement was due to the significantly higher labour market participation rates of women and the over-55s. Between 2002 and 2008, the employment of women in the EU-27 rose from 58.1 per cent to 62.8 per cent. Since 2008, however, the employment rate of women has slightly reversed, declining by 0.2 per cent in 2012–13. In overall terms, there has been a sharp decline in employment participation since 2009 across the EU which has yet to recover, and Europe's overall participation rate remains stagnant six years on from the crisis.
National experiences of employment participation are, of course, hugely divergent. It is through the prism of employment and labour markets that the heterogeneous impact of the crisis in Europe becomes starkest. As a result, the Europe of 2015 looks very different from the Europe of 10 years ago. Figure 2.8 maps labour force participation rates in the EU, demonstrating the sheer scale of inequality in employment rates ranging from a low of 53 per cent in Greece to a high of 80 per cent in Sweden. Furthermore, these two extremes symbolise the emergence of two distinct labour market blocs. The highest labour market participation rates are concentrated in a north-central bloc of Denmark, Germany, the Netherlands and Sweden, where they have risen to over 75 per cent of the labour force. In contrast to this successful core there is, with the exception of Cyprus, a southern and eastern bloc – alongside Ireland – where participation rates in 2013 all fell below 65 per cent.
The labour market situation in Europe is a different reality to that which existed before the crisis. Figure 2.9 shows the unemployment rates of 14 countries in both 2005 and 2013. In 2005, Germany had the highest unemployment rate among the selected 14 states. Remarkably, by 2013 Germany had the second lowest rate within the same group of countries, experiencing a reduction in unemployment of six per cent since 2005 despite the crisis. Greece, Spain and Cyprus, however, saw unemployment rocket during the same time period: by 18, 17 and 11 per cent respectively. The extremely low unemployment figures for Germany are an integral part of the country's economic success during the past five years, in which Germany appears to have transformed itself through the renewal of its industrial base: from a relatively high unemployment labour market to one that is increasingly buoyant.
LIVING STANDARDS AND THE GENERATIONS
A further dimension of post-crisis Europe is demography and the variable impact of the crisis on different age cohorts. The living standards of older people have been largely protected and, in some instances, have continued to improve despite the crisis, as the result of discretionary policy choices by governments. Explanations for the relatively protected position of pensioners vary, ranging from the higher propensity of older people to vote, to welfare state 'path dependency': these constitute substantial obstacles to reform of existing pensions' systems. Since 2005, employment rates for older workers have risen year-on-year: from 42 per cent in 2005 to 50 per cent in 2015, bucking the trend in overall participation rates seen in Figure 2.7. Furthermore, the increase in the employment of older workers is an almost uniform trend across Europe. Only three countries – Cyprus, Ireland and Portugal – have seen the participation of older workers in the labour market decline. Northern European states have continued to perform well in this regard, while some eastern European examples – such as Bulgaria, Poland and Slovakia – equally stand out as success stories on this measure.
For older people not in work, relative living standards have also improved. Figure 2.11 shows both the change in the median income of the over-65s and changes in pensions spending between 2005 and 2012–13. In most European countries, the median incomes of older people have continued to grow despite the crisis. A large determinant of that growth is also illustrated in the graph; in most countries, expenditure on pensions has continued to increase relative to other public spending priorities. While social spending has been reduced in many areas of the welfare state, especially on benefits for people of working age, expenditure on pensions has been protected in many EU countries. Only four have reduced their spending on pensions since the crisis: Germany, Hungary, Poland and Sweden. This indicates that the observed differences in the position of older people do not follow a pattern of regional divergence: indeed measured by their relative position, pensioners in Cyprus, Greece, Ireland, Portugal and Spain have done well – among the most improved in Europe.
It is important to note, however, that this is a relative improvement, largely due to the extremity of cuts in other parts of the welfare state. There are also major variations in the living standards of those of pensionable age: women over 60 in single households remain especially vulnerable to poverty, as are those whose private pensions offer an inadequate retirement income – a situation exacerbated by the downturn in equity markets in the wake of the 2008 financial crisis. Furthermore, reforms to public pensions systems in southern European countries will reduce the value of pensions to those now approaching retirement age. In Greece, for example, not only have the retirement ages been raised but, additionally, pensions in the future will be calculated from average lifetime pay rather than the more generous final salary indexation.
The evidence concerning the living standards of older people raises a major political question about post-crisis Europe: whether the distributional positions of particular social groups have been prioritised over others. The relative strengthening of the living standards of older people in Europe has occurred alongside a simultaneous decline in the life-chances of young people and families with children. However, the new regional political economy of Europe ensures that for young people in southern Europe, life prospects are very different to those in the north.
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Table of Contents
1. Introduction / 2. Economies and Labour Markets / 3. Inequality and Poverty / 4. Education and Health / 5. Politics and Culture / 6. Conclusions