The State of the Union 2023 lecture : Q&A

Abstract

At the peak of the sovereign debt crisis in 2013, Angela Merkel summarised the dominant thinking of the time, by implicating that Europe is not competitive because, comprising only 7% of the world’s population, contributing the 25% of the world’s GDP, it spends 50% of the global outlays on social protection. The idea that there is a trade-off between social protection and competitiveness goes back to the founding moments of the Single Market and EMU in the 1980s and 1990s. An internal market level-playing field, laced with a monetary union, lacking a lender-of-last-result facility, and a fiscal compact based on the infamous no-bailout clause, and 3% and 60% threshold for public deficits and debt, were believed to help keep member states’ allegedly ‘wasteful’ welfare in check. How different Europe looks like today. The ECB has become, as it should, a formidable lender of last resort in the wake of the Great Recession; the EU has finally come round on macroeconomic stabilisation through SURE and fiscal solidarity with the RRF. These shifts were decidedly prefaced by two key lessons in welfare provision arising from the experience of the global financial crisis. In hindsight, the more inclusive welfare states of the EU buffered the Great Recession the best for both the macroeconomy and poverty mitigation, and, among them, the most active ones bounced back from the COVID-19 pandemic the fastest. Welfare provision, if it organised around the principles of inclusive buffers, gender-balanced life-course and labour market transitions, and life-long human capital stock development and maintenance, is a formidable productive factor. It took some time for EU policy makers to come round on the positive consensus and to establish an E(M)U holding environment for active (social investment) welfare states to prosper.